HUYA Inc. (HUYA) Q2 2021 Earnings Call Transcript

HUYA Inc. (HUYA 0.42%)
Q2 2021 Earnings Call
Aug 17, 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 second-quarter 2021 earnings conference call for HUYA Inc. At this time, all participants are in a listen-only mode. Today's conference call is being recorded.

I will now turn the call over to Ms. Dana Cheng, company investor relations. Please, go ahead.

Dana Cheng -- Investor Relations

Hello, everyone, and welcome to HUYA's 2021 second-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 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 Don. Please go ahead.

Rongjie Dong -- Chief Executive Officer

Hello, everyone. Thank you for joining our conference call today. In the second quarter, we amplified our efforts to enrich content offerings and attract users, which drove steady top-line growth along with mobile user base expansion. To illustrate, total net revenues for Q2 increased to approximately RMB 3 billion, up 10% year over year and 14% quarter over quarter.

HUYA LIVE mobile MAUs reached 77.6 million in the quarter, up slightly year over year and quarter over quarter while the next month's retention rate for our HUYA LIVE app remained stable at over 70%. In this quarter, mobile users continued to contribute to over 85% of HUYA LIVE's live streaming revenues. With our relentless commitment to providing users and the broadcasters with a better experience, we have always been deepening our technology advanced efforts and focused on product optimization. In late May, we upgraded our HUYA LIVE app to the version 9.0, which introduced new functions, such as multi-screen, simultaneous viewing, and real-time highlights editing.

[Foreign language]For example, in the latest version, a user has access to a multi-screen viewing panel to watch different top broadcasters at the same time. Besides this, leveraging HUYA's AI capability, the new version can now automatically identify the highlight momentum of a streaming session and generate video clips, making video production easier and more efficient. In the second-quarter average MAUs, who watch videos on our platform, increased to approximately 30 million. Our open platform for third-party application developers also continued to expand in the second quarter.

By the end of June, more than 250 tools had been developed on our open platform and those tools were used by over 740,000 broadcasters. On a quarter-over-quarter basis, the daily active broadcasters who used the 30 -- third-party applications on our open platform grew more than 60%. Moving on to our collaboration with Tencent, in the second quarter, average MAUs, who watch the HUYA LIVE streaming content across Tencent's platforms, which are not counted in our reported MAUs, were around 23 million, nearly doubling year over year. Notably, our live streaming content related to the QQ server all-star tournament attracted a large number of users for viewing on QQ mobile.

Lastly, I would like to provide more content around our strategies after the merger termination with DouYu we announced last month. According to the announcement posted by the State Administration for Market Regulation of the People's Republic of China, on July 10, 2021, the proposed merger between HUYA and DouYu was prohibited following SAMR's antitrust review. We fully respect and will abide by the SAMR decision and will comply with all regulatory requirements and conduct our businesses in accordance with the applicable laws and regulations. As we remain committed to further expanding our user base and strengthening our leading position in the game live streaming market, we are focused on effectively implementing our growth strategy.

HUYA will continue its investments in content, including in acquiring, cultivating and maintaining all the broadcasters, obtaining broadcasting rights for popular e-sports, tournaments and then developing attractive sales-generating content. Meanwhile, we will endeavor to advance product optimization and deliver a superior user experience. We also expect to further deepen our cooperation with Tencent. We are confident that our capabilities in fostering and retaining streaming talents, enriching, and producing quality content as well as our expertise in technology and product innovations will continue to underpin HUYA's core competitiveness in the game live streaming industry.

With that, I will now turn the call over to our CFO, Catherine, who will 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 the second quarter, we broadcasted 122 third-party e-sports tournaments, among which the top tournaments included LPL Spring and Summer, KPL Spring, LoL Mid-Season, Invitational, and PUBG Champions League Spring. Total viewership for these tournaments reached around 673 million in the quarter. On the front of our self-produced content, we organized 45 e-sports tournaments and entertainment shows, and generated total viewership of 116 million. In particular our self-branded tournament, the 6th HUYA Mobile Game Arena, [Foreign language] or HMA has hit outstanding viewership in the quarter, covering 14 popular mobile games, including HOK, CFM, Battle of Balls and CODM.

HMA is now a leading comprehensive mobile game tournament in China. Additionally, following the traction from LPL, we produced a commentary show, HUYA Game Watch Room, [Foreign language] to provide professional game play analysis for game lovers. The show went viral during the LPL season and became a major alternative channel for LPL fans to watch the game. In terms of entertainment PGC shows, HUYA Kungfu Carnival Season 4, [Foreign language], a mixed martial arts competition joined by HUYA's outdoor broadcasters and celebrities was the leading example of the season.

Besides this, in June, we also introduced God Player, [Foreign language], a live action role playing show to capture the younger generation's growing interest in such category. Since we took the initiatives to introduce more media content last year, there has been a clear trend of development and diversification on our platform, particularly in the sectors such as food video, animation video, and funny moments sharing videos. Moving on to our overseas business. In June, the overseas MAU picked up to close to 27 million, mainly driven by local e-sports events.

As we discussed previously, we have been focusing on monetization-driven growth. Our overseas revenues increased by approximately 200% year over year and then the contribution from overseas revenue is also climbing up with the margin drag from overseas business declining. Next, I will walk you through our financial highlights. In the second quarter, our total net revenues grew by 10% year over year to approximately RMB 3 billion.

Our live streaming revenues were close to RMB 2.6 billion in the quarter, up slightly from the same period last year. The number of paying users for HUYA LIVE in the second quarter came in at 5.6 million, lower than the same period last year mainly due to the pandemic lockdown last year, setting a higher base. Advertising and other revenues increased by 190% year over year to almost RMB 383 million in the second quarter. On second-quarter profitability, our non-GAAP gross profit was RMB 594 million and non-GAAP gross margin was 20.1%.

Our non-GAAP operating profit was RMB 249 million and non-GAAP operating margin was 8.4%. Our non-GAAP net profit was RMB 250 million and our non-GAAP net margin was 8.4%. Now moving on to our financial details. Unless otherwise specified all the growth rates are on year-over-year terms.

Cost of revenues increased by 12.2% to RMB 2.4 billion for the second quarter, primarily attributable to the increase in revenue sharing fees and content costs. Revenue sharing fees and content costs increased by 21.2% to RMB 2 billion for the second quarter, primarily due to the increase in revenue sharing fees and the increase in spending in e-sports content and our content creators. Bandwidth costs decreased by 35.3% to RMB 171 million for the second quarter, primarily due to improved bandwidth cost management and continued technology enhancement plans. Gross profit increased by 1.1% to RMB 581 million for the second quarter and gross margin was 19.6% for the second quarter.

Research and development expenses, increased by 15.6% to RMB 208 million for the second quarter, mainly attributable to increased personnel-related expenses. Sales and marketing expenses, increased by 45.9% to RMB 167 million for the second quarter, primarily attributable to increased marketing expenses to promote the company's content, products, services, and brand name. General and administrative expenses decreased by 48.5% to RMB 72 million for the second quarter, mainly due to lower share-based compensation expenses. Operating income increased by 0.3% to RMB 182 million for the second quarter and operating margin was 6.1% for the second quarter.

Interest and short-term investments income was RMB 58 million for the second quarter, compared with RMB 78 million for the same period of 2020, primarily attributable to the decreased interest rates. Income tax expenses, increased by 13.7% to RMB 58 million for the second quarter. Net income attributable to HUYA Inc. for the second quarter was RMB 186 million, compared with RMB 207 million for the same period of 2020.

Non-GAAP net income attributable to HUYA Inc. for the second quarter, 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 was RMB 250 million, compared with RMB 331 million for the same period of 2020. Diluted net income per ADS was RMB 0.77 for the second quarter and non-GAAP diluted net income per ADS was RMB 1.04 for the second quarter. As of June 30, 2021, we had cash and cash equivalents short-term deposits and short-term investments of RMB 10.7 billion, compared with RMB 10.6 billion as of March 31, 2021.

The increase was primarily due to net cash provided by operating activities of RMB 174 million for the second quarter. With that, I would now like to open the call to your questions.

Questions & Answers:

Operator

[Operator instructions] We have the first question coming from the line of Thomas Chong from Jefferies. Please go ahead.

Thomas Chong -- Jefferies -- Analyst

[Foreign language]Thanks management for taking my questions. I have two questions. The first question is about our content strategies. Can management comment about our thoughts in the second half as well as the spending that we are looking at? And my second question is about our key operating metrics in terms of the MAU paying users as well as ARPU.

How should we think about the trend as we come into the second half? Thank you.

Rongjie Dong -- Chief Executive Officer

[Foreign language]

Dana Cheng -- Investor Relations

All right. I will translate for Mr. Dong. Regarding your first question on content strategy, so actually since the beginning of this year, our management made two versions of the strategic plans for this year in different scenarios whether the SAMR will pass or not pass the deal.

Up until we received the notification of SAMR to prohibit the merger deal, we still stick to the original plan in terms of content strategy. So now that we have heard the news from SAMR about prohibiting the merger deal between HUYA and DouYu, there won't be major adjustments to the strategy, especially the content strategy. And now that the competitive landscape compared with before might be a little bit changed, given the SAMR prohibited the deal, so there might be a certain degree of growth for the content investments from our perspective. And Catherine will take the second question.

Catherine Liu -- Chief Financial Officer

And regarding your MAU questions, because we will continue to invest in our content and broadcasters in the second half, so in the second half, we do expect that our MAUs will continue to grow and probably reaccelerate the growth rate for mobile MAUs. And I think in the second half our focus – main focus is still trying to grow our mobile MAUs and that then this is still probably our key goal in the second half. And next?

Thomas Chong -- Jefferies -- Analyst

Thank you.

Operator

Thank you. We have our next question, which is coming from the line of Lei Zhang from Bank of America Securities. Please go ahead.

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

[Foreign language]Thanks management for taking my questions. Two questions here. First, can you share with us the business strategy post the close of merger with DouYu? Secondly, any more color on the integration with Tencent recently? 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 the post-termination of the merger, impact on these strategic changes.

Actually, there is not much to be changed for the strategic planning of HUYA. We will stick to the original plan to follow with our roadmap for the year and going forward, and we have confidence to strengthen our leadership position going forward. And secondly, I would like to mention that we do have confidence in the overseas market, especially for those countries and regions who performed better in building up the content ecosystem and our business model, and we feel we are going to have a brighter future and we do have confidence in that. For your second question, regarding the collaboration with Tencent, we are actually in close conversation with Tencent regarding to carry out more innovative -- cooperative working methods and more way to play out the business -- to play out the operational models of the two -- of the collaboration, so more things to be carried out going forward with Tencent.

I hope that answers your question, and that's it.

Catherine Liu -- Chief Financial Officer

And then to add -- regarding to the cooperation with Tencent, we have continued to strengthen our cooperation with Tencent in various fronts. And we believe that in the future, there would be more cooperation between us and Tencent. And we will update investors if we have some major updates on this front. And I hope this answers your question.

And next?

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

OK. Thank you. Very helpful.

Operator

We have the next question. This is coming from the line of Yiwen Zhang from China Renaissance. Please go ahead.

Yiwen Zhang -- China Renaissance -- Analyst

[Foreign language]Thanks for taking my question. I have two questions. The first is regarding overseas business. You mentioned the overseas MAU have reached 27 million and also this year, we will ramp up the investment overseas.

Could you share more color in terms of user acquisition, content buildup, and monetization? And secondly is on the video content. I think this is what we are discussing in the past few quarters. Can you share some color in terms of how the video content helped the user acquisition, the engagement, and the retention? Thank you.

Catherine Liu -- Chief Financial Officer

Thank you. Regarding our overseas business, we have seen a pretty good progress as we have been emphasizing on monetization. In the overseas market, we have seen significant results. In the second quarter, our overseas revenues actually increased by approximately 200% year over year.

And also, the operating loss has also been narrowed down, so we are pretty confident in our overseas business and we do expect that the overseas business will contribute even much more significant revenue contribution to us in the next year. And in terms of our video business, we have been developing sort of a new video content. And then in the second quarter, we also noticed that our video content users have been increasing. And Mr.

Dong just mentioned, in the second-quarter average MAUs for watching video on our platform actually increased to approximately 30 million. And in the second half, we do consider to also launching a new APP, specifically for our video product. H.ope this answers your question.

Rongjie Dong -- Chief Executive Officer

[Foreign language]

Dana Cheng -- Investor Relations

I'll translate that just to provide more color on our video business. Mr. Dong mentioned before there is a certain form of video business on HUYA's platform that is laying in between the traditional videos and the streaming sessions in the form of video [Inaudible] or in other words ongoing replay of streaming. And from the statistics that we have, I think the growth rate of such category are quite high.

And we believe in the form of doing streaming business, we can actually make our video business prosper in the future. And as of now, we think the results that we see in the video business or the video [Inaudible] business is actually quite satisfying.

Yiwen Zhang -- China Renaissance -- Analyst

Thank you.

Operator

Thank you. We have the next question from Ritchie Sun from HSBC. Please go ahead.

Ritchie Sun -- HSBC -- Analyst

[Foreign language]I will translate the questions myself. So first question is about game video. Can management discuss the potential monetization model and also progress of monetization for game video? And what are the areas that we need to improve further for game video content? And the second question is on regulation. We see the heightened regulation risk of the industry.

Can management discuss how live streaming regulation, online games as well as cybersecurity and data privacy regulations, the impact on the platform, and especially on the P -- profit and loss side from these regulations and are we going to incur more costs to fulfill these regulations? Thank you.

Rongjie Dong -- Chief Executive Officer

[Foreign language]

Dana Cheng -- Investor Relations

For your first question, regarding the video business monetization method, currently the top priority for the company regarding the video business is to consider how to better integrate the live streaming business with the video business and -- just so that the video business can be extended. So probably currently, it's a little bit too early to talk about the business model. But what we can see right now for the video business, advertising is probably the top choice for the monetization method.

Catherine Liu -- Chief Financial Officer

OK. And then for your second question of the recent regulatory changes, we do believe that the recent regulatory changes I think will help the industry in the long-term and then we, as a company, will definitely abide for all the regulatory changes or guidance. And then, so far, I think we have received and also are expecting some of the -- probably the details of the guidelines to come out. And so we will update with investors if we saw some of the detailed guidelines for potential regulatory guidelines.

And I hope this answers your question. And next?

Ritchie Sun -- HSBC -- Analyst

Thank you.

Operator

Thank you. We have the next question. This is coming from Tian Hou from T.H. Capital.

Please go ahead.

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

Yes. Good evening, management. Two small.[Foreign language]The first question is about what management see in the second half about game content. Are there any major content going to come out? The second one is on the platform, what does management see the users and activity level as the students has less school work and also not much place to go to travel? The third one is regarding the cloud game.

Company has seen a developing cloud game for a while, so can management share some color about the progress and the plan for the future? Thank you.

Rongjie Dong -- Chief Executive Officer

[Foreign language]

Dana Cheng -- Investor Relations

So for your first question regarding the summer, usually from the seasonality that we have observed so far, during the summer school holidays there will be a certain growth of users. Since it's coming to the school holidays in this summer in the end, we are seeing a growth of the users as well. But regarding the other factors that you mentioned, we haven't really seen much. And for your second question regarding the new game titles, the way we have been hoping that the two pop-up -- potential blockbuster games, the D&F Mobile and League of Legends Mobile, can be released soon.

Because HUYA has quite excelled at promoting the mobile games and make sure that promoting the mobile games on our live streaming platform can be a strength and maintain our leading positions, actually the preparation for those two games has already been initiated. For example, for League of Legends Mobile, it's been started in the first -- since the beginning of 2021. And for D&F Mobile, we have been preparing for the launch of that since last year. So we're really hoping that those two potential blockbuster games can be launched in the second half.

Catherine Liu -- Chief Financial Officer

And then regarding to your -- yes, regarding to your question about the cloud game, actually since we launched our cloud game platform HUYA, we have been covering over 200 games right now and then we have been improving our products since the launch. And currently we believe that our product, in terms of technology and then the user friendliness, is in the sort of the industry-leading level. And currently, we are still focusing on trying to reduce the bandwidth cost per user and increase our MAUs and DAUs. Actually, since the -- since Yowa launched, the users growth is pretty fast.

So currently, our focus is still on growing users, improving products, and then trying to reduce the bandwidth cost for each user. And then probably next year, we will consider trying to do some commercialization for the cloud game but currently, it's still at early stage. Hope, this answers your question. And next?

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

Yes.

Operator

Thank you. We have the next question from Vincent Yu from Needham & Company. Please go ahead.

Vincent Yu -- Needham & Company -- Analyst

[Foreign language]Thanks management for taking my question. My first question is about investment plans. So now that the merger deal has been called off, would the company now look to acquire the other companies within -- like other verticals or overseas, considering we have a big cash balance? My second question is will we see increase in content costs related to purchase of tournaments' broadcasting rights after this merger has been called off? Thank you.

Catherine Liu -- Chief Financial Officer

Regarding to your first question, in addition to our operational cash needs, i.e. continue to invest in content and broadcasters, we do -- we will consider the sort of the investments or potential acquisitions along our value chain both domestically or in the overseas market. But currently, we haven't really done any significant investments or acquisition yet. And then regarding to your second question, I will refer you to Mr.

Dong.

Rongjie Dong -- Chief Executive Officer

[Foreign language]

Dana Cheng -- Investor Relations

Regarding your question on the e-sports tournaments' broadcasting rights, I think from our perspective, acquiring the broadcasting rights for those tournaments is quite important in the sector of e-sports. As we all know that e-sports has become a professional game that has been -- and is also included in the Asian Games for next year. And actually, as we announced before, we have already got the exclusive broadcasting license for LPL and it's related games in broadcasting rights. So going forward, we believe HUYA will continue the acquisition of broadcasting rights in a moderate way.

Vincent Yu -- Needham & Company -- Analyst

Thank you.

Operator

Thank you. As there are no further questions, I would like to hand the conference back to the company for any ending remarks.

Dana Cheng -- Investor Relations

Thank you all for joining our conference call today. If you have further questions, feel free to contact [email protected] and we look forward to speaking with you in the next quarter. Thank you.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

Dana Cheng -- Investor Relations

Rongjie Dong -- Chief Executive Officer

Catherine Liu -- Chief Financial Officer

Thomas Chong -- Jefferies -- Analyst

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

Yiwen Zhang -- China Renaissance -- Analyst

Ritchie Sun -- HSBC -- Analyst

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

Vincent Yu -- Needham & Company -- Analyst

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