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HUYA Inc. (NYSE:HUYA)
Q1 2021 Earnings Call
May 18, 2021, 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 first-quarter 2021 earnings conference call for HUYA Inc. At this time, all participants are in listen-only mode. Today's conference call is being recorded.

I will not turn the call over to Ms. Dana Chang, company investor relations. Please go ahead.

Dana Cheng -- Investor Relations

Hello, everyone, and welcome to Huya's 2021 first-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 laws. Please also note that Huya's earnings press release and this conference call include discussion 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 are pleased that with continued momentum we saw across our business in the first quarter, which sets us on a solid positive to begin the new year. Total net revenues for Q1 increased to RMB2.6 billion, demonstrating growth of 80% year over year despite the higher comparable revenue base associated with a pandemic lockdown period in Q1 2020.

We continue to see new growth and believe that our relentless focus on content investment and the products in [Inaudible] will drive the future growth of our business, and that creates more value for our users. The user growth that we enjoyed during the pandemic lockdown period has persisted, and that we continue to bolster our user community. In Q1 mobile MAUs of Huya Live reached 75.5 million, up slightly from the same period last year. Additionally, the [Inaudible] retention rate of our Huya Live remained stable at over 70% in Q1.

Mobile users have been the pillars of our business, and our primary focus in the fourth quarter this year. Mobile users contributed to over 85% of Huya Live streaming revenues and they also constituted growth to 88% of our core daily active users on Huya Live. Our mobile [Inaudible] strategy has enabled us to become the industry leader, and that we plan to further emphasize growth consistency, focusing on more value as our primary user metric. We believe our investments in content and products will gradually pay off.

Our accumulated content has become the engine driving us forward, attracting new users and fulfilling more online needs as users are finding our platform to be progressively more comprehensive, attractive, and convenient. In Q1, we continue to reinforce our product offerings and the content library with a number of successful initiatives. In March, we launched the open platform for impactful features to offer more innovative gameplay and to improve the uniqueness of Huya game studios' broadcasters and the viewers. Our [Inaudible] features helping developers, including gift dropping to droppers [Inaudible] broadcaster, game betters both [Inaudible] into active games [Foreign language] e-commerce live streaming [Foreign language] one click to join broadcasters gameplay [Foreign language] one click to streaming [Foreign language] and real-time monitoring panel [Foreign language].

We believe the new features will not only strengthen our value proposition in the industry value chain but also help shape a new model for game operations and to improve our capabilities in monetizing diversity. As our fourth step, we cooperated with Peacekeeper Elite and embedded the [Inaudible] gameplay features within the game's live streaming and our Peacekeeper Elite channel. For example, when a game broadcaster [Inaudible] or refused certain [Inaudible] the live-streaming room will be triggered to send our -- to send out designated in-game reward for viewers to claim. The success of such new features has accepted the Peacekeeper Elite to both acquire new traffic and retain existing users and can also provide our viewers and the broadcasters with more fun and immersive experience.

Our open platform for third-party application developers also continued to expand in Q1. By the end of Q1, they are close to 200 [Inaudible] tools, developers, and over 600,000 broadcasters had used these tools. On a quarter-over-quarter basis, the daily active users and the daily active broadcasters both [Inaudible] have used the third-party applications from the open platform grew over 100% and 48%, respectively. In April, we signed a licensing agreement with Tengjing Sports and [Inaudible] exclusive broadcasting rights in China for League of Legends Pro League, LPL; League of Legends Development League, LDL; and the LPL's All-Star weekend service, as well as related licensing rights from 2021 to 2025, securing exclusive broadcasting rights will enrich our content offerings and thus, strengthen our collaboration with Tengjing Sports [Inaudible] opportunities.

With that, I will now turn the call over to our CFO, Catherine, to share her insights on the operating metrics and the 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 Q1, we broadcasted 92 third-party e-sports tournaments, among which the top tournaments including LPL Spring, PGI.S, i.e., PUBG Global Invitational.S, and KPL Spring. Total viewership for these tournaments reached around 535 million in Q1, representing 41% year-over-year growth. On the front of our self-produced content, we organized the 36 e-sports tournaments and entertainment shows and generated a total viewership of 195 million, representing 73% year-over-year growth. Recall that in Q1 last year, COVID-19 impacted the schedule of third-party e-sports tournaments and the hosting of our own offline events.

We're glad that tournaments and events are back, which is also reflected in the higher viewership. Huya's game for piece screen event. [Foreign language] is the top-performing self-produced event in Q1 that has leveraged the influence of Huya celebrity broadcasters to compete with professional gamers. Additionally, we organized that the regional tournament for Teamfight Tactics within Huya's community and help with the rising game accomplish another signature event.

On the entertainment PGC shows side, on the styling king. I -- I'm [Foreign language] and fashion styling competition show, and last winner, a role-playing detective show are the leading examples of Q1. Moving onto our overseas business. The MAUs of our overseas business was around 25 million in the first quarter, slightly higher than the same period last year.

Our strategy has been shifted to focus on regions and countries with higher monetization potential. And as a result, our overseas revenues almost doubled year over year and our overseas loss also narrowed down. Next, I will walk you through our financial highlights. In Q1, our total net revenues grew by 8% year over year to over RMB2.6 billion.

Our live streaming revenues increased by 5% year over year, close to RMB2.4 billion in Q1. The growth was primarily due to the increase of revenue of paying user. The number of paying users for Huya Live in Q1 reached the -- 5.9 million, compared with 6.1 million for the same period last year, mainly because the users spend more time per day and are more willing to pay on our platform during the pandemic lockdown period last year. Advertising and other revenues increased by 55% year over year to close to RMB213 million in Q1, primarily driven by revenues from content licensing.

Our profit continued to improve in Q1. Our non-GAAP gross profit increased by 8% to RMB531 million. Non-GAAP gross margin was 204%. Our non-GAAP operating profit increased by 7% to RMB242 million.

Non-GAAP operating margin was 9.3%. Our non-GAAP net profit increased by 1% to RMB266 million. And our non-GAAP net margin was 10.2%. Now, let me move on to our financial details.

If not specified, our growth rates are on a year-over-year terms. Costs of revenues increased by 7.9% to RMB2.1 billion for Q1, primarily attributable to the increase in revenue-sharing fees and content costs. Revenue-sharing fees and content costs increased by 14.1% to RMB1.7 billion for Q1, primarily due to the increase in revenue-sharing fees in relation to higher live streaming revenues and the increase in spending in e-sports content. Bandwidth costs decreased by 24.4% to RMB182 million for Q1, primarily due to improved management in bandwidth costs and continued technology enhancement efforts.

Gross profit increased by 8.2% to RMB514 million for Q1. Gross margin was 19.7% for Q1. Research and development expenses increased by 27.6% to RMB199 million for Q1, mainly attributable to increased personnel-related expenses. Sales and marketing expenses increased by 35.7% to RMB145 million for Q1, primarily attributable to the increase in marketing expenses to promote the company's content, products, services, and brand name.

General and administrative expenses decreased by 6.8% to RMB84 million for Q1, mainly due to lower share-based compensation expenses. Operating income increased by 21.6% to RMB162 million for Q1, and operating margin was 6.2% for Q1. Non-GAAP operating income, which excludes share-based compensation expenses, increased by 6.7% to RMB242 million for Q1, and non-GAAP operating margin was 9.3% for Q1. Income tax expenses increased by 4.9% to RMB39 million for Q1.

Net income attributable to HUYA Inc. for Q1 increased by 8.4% to RMB186 million. Non-GAAP net income attributable to HUYA Inc. for Q1, which excludes share-based compensation expenses, gain on fair value change of investments, and equity investee's investments and equity investee's partial disposal of its investment, net of income taxes increased by 0.9% to RMB266 million.

Diluted net income per ADS was RMB0.77 for Q1, and non-GAAP diluted net income per ADS was RMB1.1 for Q1. As of March 31, 2021, the company had cash and cash equivalents, short-term deposits, and short-term investments of RMB10.7 billion, compared with RMB10.5 billion as of December 31, 2020. The increase was primarily due to net cash provided by operating activities of RMB166 million for Q1. With that, I would now like to open the call to your question. 

Questions & Answers:


Operator

Thank you. [Operator instructions] Your first question comes from the line of Wei Jiang from Bank of America Merrill Lynch. Please ask your question.

Wei Jiang -- Bank of America Merrill Lynch -- Analyst

Hi. [Foreign language] Thanks to management for taking my question. Two questions here. First, can you give us some update with the real in a competitive landscape, especially the competition with Bilibili, which has good growth in live streaming in recent quarter? Secondly, any color on gross of our advertising and other revenue, what's the major driver here? Thank you.

Rongjie Dong -- Chief Executive Officer

[Foreign language] 

Dana Cheng -- Investor Relations

All right. I will translate for Mr. Dong. Regarding your first question, for -- with the way as in new entrance to the game-wise streaming industry, it is pretty natural for them and to being a relatively higher yearly growth as it due in the growth phase for them, especially thinking about that in the old days, both JOYY or Huya also enjoying an outstanding year-over-year growth as well.

So it is a quite natural thing to happen. And from our internal perspective, we don't really feel pressured or threatened by the entrances but a little less due to the attitude. And coming from the perspective of a competition landscape, there is almost no change compared to the situation in the last quarter and what we can do is to strengthen our own capabilities facing the current competitive landscape. And we see more opportunity in the second half of this year because if you look back in the past one and a half years, we deploy many of the big teams, especially the professional teams in the industry, which is why we are more optimistic and expecting more opportunities from the new game launches in the second half of this year.

And Catherine will take your next question.

Catherine Liu -- Chief Financial Officer

As for the question of the faster growth of advertising and other revenues, this is mainly driven by revenues from licensing of content. OK, I hope this answers your question. And next?

Operator

We'll proceed to the next question from Vincent Yu of Needham and Company. Please ask your question.

Vincent Yu -- Needham & Company -- Analyst

[Foreign language]

Hi, Mr. Dong and Catherine, good evening. Thanks for taking my question. I have two questions.

The first is about what is our strategy for the international market for this year. How much top-line contribution will we see in these markets will in 2021? And will we see a break-even on a stand-alone basis in 2021? The second is, can management help us understand more about the strategy around content investments in 2021? Will we focus on acquiring a license for esports tournaments or in-house development of PUBG's content and can we share the size of investments we are ready to deploy? The third question is how should we think about the recent waves or antitrust probes brought by regulators? Can management share any process that we have for our content module this year? Thanks. 

Catherine Liu -- Chief Financial Officer

Regarding your first question about the international business, we're still at the investment stage and we still expect -- we'll probably continue to invest in an overseas business for the next couple of years. But the good news is that you know, this year our strategy has been focused on monetizing -- improve our monetization. So in the first quarter, our overseas revenue has doubled year over year and we also expect that the overseas business revenue contribution will be increasing this year. At the same time, the loss of overseas business has also narrowed down both in terms of an absolute dollar or as a percentage of revenue.

We think in some countries, we will be able to make a breakeven point, but overall, the overseas business is still going to be at the investment stage this year. And therefore, the next question I will relate to Mr. Dong to answer this.

Rongjie Dong -- Chief Executive Officer

[Foreign language]

Dana Cheng -- Investor Relations

All right. I will translate for Mr. Dong regarding your questions about the content investment. We have already asked about the progress of the current ongoing merger with DouYu.

And from what we can see, right now, it is quite likely that in the third quarter this year, DouYu will reach some sort of conclusion and see some progress in the future. And given these circumstances, we think we might adjust to the current strategy in terms of content investments. And in terms of the balanced play between the self-produced content and purchasing a third-party e-commerce tournament, we think Huya has been doing quite well in terms of producing its own branded content whether in the form of nongaming or in the form of game esports tournament. For example, we have just recently posted a favorite new series of the Huya Kungfu Carnival, and it has been a lot of attraction among internet users.

That is why we will not only focus on purchasing quality esports tournaments from third parties, but we will also solidify our capabilities to produce our own branded content.

Catherine Liu -- Chief Financial Officer

Operator, next question, please.

Operator

Your next question is from Thomas Chong of Jefferies. Please ask your question.

Thomas Chong -- Jefferies -- Analyst

[Foreign language]

Thank you, management, for taking my question. My first question is could the management provide some updates about the collaboration with Tencent? The second one is, could the management comment on the strategy this year in the game and the nongame broadcasting? Thank you.

Catherine Liu -- Chief Financial Officer

Regarding your first question, this quarter, we have continued the collaboration with Tencent. For example, this March, we also launched an open platforms or interactive features to offer more innovative games. You know, the first game that we have cooperated with is Peacekeeper Elite, and then the result was that in terms of increasing the users and also increasing the interactive features -- the interaction between the users and then the platforms. At the same time, we continue to collaborate with Tencent in various ways such as games and also some of the major Tencent products as well.

So we expect the collaboration with Tencent to will continue to go on and in the future, it will also bring us more users and also monetization opportunities.

Rongjie Dong -- Chief Executive Officer

[Foreign language]

Catherine Liu -- Chief Financial Officer

Mr. Dong has answered the question regarding the content strategy. Firstly, we like to strengthen that. Huya is actually one -- Huya is actually the platform in the game live industry that has gained the vast majority of the third-party e-sports tournaments broadcasting rights, that is, for the e-sports tournaments.

And for the professional, we generated cost spend, so we also have gained the leading production capabilities among the industry players. And secondly, from a gaming perspective, we have to say that a lot the new opportunities will be there for the new games in the second half of this year. And it's quite likely that some of the new game -- potential partnerships will be released in the second half of the year and is quite anti -- is quite expected by the users to gain tractions. And thinking about that Huya has a naturally long page and a strong capability to promote new games and all the way to the new game live streaming sessions on our platform.

We will say the opportunities are vast out there in the second half of this year, which is why we're going to invest some of our resources to the -- promoting those new games. And on the front of the nongame content, looking at the data in the past, the growth rate for the nongame content is actually higher than the growth rates of the gaming content. And our content pool for the non-gaming factors are actually enjoying a prosperous growth over the past few quarters. For example, traditional sports is actually quite outstanding in the past.

And that makes us think whether we will need to invest into gaming -- the third-party non-gaming content broadcasting rights in the future. That is also quite -- that also quite potential for us. So, these are our content strategy for the rest of the year, and we can take in that question.

Operator

Yes. So, for the next question, it's from Ritchie Sun of HSBC. Please ask your question.

Ritchie Sun -- HSBC -- Analyst

Hey, Dong. [Foreign language] Thank you, management, for taking my questions. I have a question about game video strategy. So, how is the traction of game video strategies? Any operating metrics to update us? And with more and more game video users, how would that affect paying ratio and ARPU trends going forward? Should we assume game video users are less hardcore and hence, the paying ratio and ARPU would be lower? Thank you.

Rongjie Dong -- Chief Executive Officer

[Foreign language]

Catherine Liu -- Chief Financial Officer

I will translate for Mr. Dong regarding your question for our video business. Our video business has been running for one or two quarters already, and there has already been some new thought in terms of how to develop the new strategy for the video business. As we said before, previously, we have been focusing on the on-demand videos, to be involved with acquiring new users for the video business.

That actually requires a longer time. But thinking about the nature of Huya platform as a live streaming platform, we feel like the quarter-two-winning streaming sessions will be more natural form for Huya to engage in the video business, which is why we have already tested this new format of video business the quarter-two-winning streaming business in the first quarter within one or two content categories of our gaming sectors. And we have received positive feedback whether from the data of users or from the players of the industry-value chains. And in the second quarter, we will extend the content category coverage from those one to two games sectors to more game titles in the second quarter.

And we believe we see -- we think growth of our video business that will actually help us strengthen our attractiveness as the -- as a platform to attract those advertisers and that will also help us to strengthen our monetization capability of the advertising business. That's it. Thank you.

Operator

And we will take the final question from Tian Hou of T.H. Capital. Please ask your question.

Tian Hou -- T.H. Capital -- Analyst

[Foreign language] I'll translate myself. So, what's the management's expectation for Lord of Legends -- League of Legends to be online. And also, once that gets started, what is the potential impact to our -- like the game -- the streaming business. Thank you.

Rongjie Dong -- Chief Executive Officer

[Foreign language]

Tian Hou -- T.H. Capital -- Analyst

Thank you.

Catherine Liu -- Chief Financial Officer

For the League of Legends mobile version, we actually started the preparation for that beginning from earlier this year, and we have already sorted out all the potential professional leagues and the broad question is what we can gain on our platform. And then we also quite emphasized the communications. We see related King studios and that we paid players of the new game. And hopefully -- and it's quite likely that the League of Legends mobile version will be released in the second half of this year.

From our own perspective and thinking about seasonality, it is just quite favorable for us if the game can be launched in the summer school holiday season. Thank you.

Operator

There are no further questions. Now, I'd like to turn the call back over to the company for closing remarks.

Catherine Liu -- Chief Financial Officer

All right. Thank you all for joining our conference call today. If you have further questions, feel free to contact ir@huya.com. And we look forward to speaking with you in the next quarter.

Thank you.

Operator

[Operator signoff]

Duration: 46 minutes

Call participants:

Dana Cheng -- Investor Relations

Rongjie Dong -- Chief Executive Officer

Catherine Liu -- Chief Financial Officer

Wei Jiang -- Bank of America Merrill Lynch -- Analyst

Vincent Yu -- Needham & Company -- Analyst

Thomas Chong -- Jefferies -- Analyst

Ritchie Sun -- HSBC -- Analyst

Tian Hou -- T.H. Capital -- Analyst

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