HUYA Inc. (HUYA) Q3 2021 Earnings Call Transcript

HUYA Inc. (HUYA 1.36%)
Q3 2021 Earnings Call
Nov 09, 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 third quarter 2021 earnings conference call for HUYA Inc. [Operator instructions] I'll now turn the call over to Ms. Hanyu Liu, company investor relations.

Please go ahead.

Hanyu Liu -- Investor Relations

Hello, everyone, and welcome to Huya third quarter 2021 earnings conference call. The company's financials and operating results were issued earlier today and 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 the prepared remarks, and the call will conclude with a Q&A session.

Before we continue, please know that today's discussion will contain forward-looking statements made under the safe harbor provision 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 this 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 know 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. In the third quarter of 2021, we achieved together solid results, [Inaudible] record-high levels, and we continue to steadily grow our topline. Huya Live's mobile MAUs reached 85.1 million in the third quarter, up 15% year over year and 10% quarter over quarter.

The strong user growth was mainly driven by our comprehensive content offerings of operational activities and continued promotion efforts during the summer esports events. The next segment, retention rate, for our Huya Live app also remained stable at over 70%. As a technology-driven platform, we have been continuously focused on product and service upgrades to deliver more fun and immersive experience to our users. In particular, we actively promoted the development and the advertising and more impactful features in livestreaming, supporting broadcasters' ability to produce quality content more conveniently, as well as it makes it easier for all our users to participate while viewing livestreams.

I will now provide you with some updates on those initiatives. Our open platform for third-party application, the work has been up and running for almost 2 years. By the end of September, more than 290 tours had been toured on this open platform, and over 888,000 broadcasters covering our core categories, including esports tournaments, games, and pan-entertainment, had to use their [Inaudible] tours. In particular, the recently added capabilities for more multi-user participation, such as draw and get-together, [Foreign language], and [Inaudible] Taekwondo, are now quite popular.

More users can join the streaming interaction and gifting, and the bullet chats sent by users can also influence better results. These increases the interactivity between broadcasters, helping users to effectively level up and strengthen the monetization capabilities our broadcasters. In August, we introduced our feature called [Inaudible] one-click to join broadcasters gameplay [Foreign language]. It was first applied in Peacekeeper Elite channels.

With this interactive gaming function, users can team up with streamers to play games while launching livestreaming sessions. The gift drop feature we released earlier this year is now available in more games, including the latest LOL Wild Rift. Through our cooperation with game studios, gift drop will be triggered in a live channel for users to claim game tours and schemes after downloading this new game. Achieving a certain length of viewing time or when a broadcaster strikes a certain queue, it enhances the engagement in the streaming session, as well as participating pacing of the game itself.

We believe the introduction of this interactive feature not only offers more innovative gameplay for our users and the broadcasters, it also improves the uniqueness of Huya to game studios. More importantly, it opens up more opportunities for our deep penetration in the game value chain. In terms of streaming technologies, we recently added HDR support to our esports tournament streaming, enabling users to enjoy more delicate game scenes compared to the existing ultra HD experience while leveraging ourself developer while recognizing technology for game livestreaming. The newly launched AI caption function identifies accurate game terms, as well as player and team names, and provide real-time subtitles for live events together with our live event instant playback.

And the simultaneous multi-screen viewing functions, we were able to provide the best tournament regarding this programs so far in the recently concluded 2021 season of League of Legends World Championship. Supported by the above-mentioned data, technologies and our operational expertise, we continued our leading market share in broadcasting world 2021. In light of the dynamic business environment, it is pivotal for us to strengthen our competitive advantages. This primarily reside in fostering and retaining streaming talent, in reaching and producing quality content and delivering technology and product innovations.

We are also confident that we can capture the opportunities brought by the new game launches. In recent quarters, there has been more regulatory attention surrounding our industry. We believe that the intention is to better regulate the space and promote its healthy long-term development. We have been closely monitoring and following the regulatory guidelines and we will continue to strengthen our operations in accordance with the regulatory requirements.

Despite of the potential impact of regulatory changes of our near-term growth, we believe in our agility and ability to remain competitive and relevant to create long-term value as we continue investing in quality content, upgrading products, delivering yields of growth, improving monetization, and solidifying our leading position in the game livestreaming market. With that overview, I will now introduce our VP of finance, Ashley Wu, who has been with Huya for years and has extensive company and industry knowledge. She will provide you with our operating metrics in more detail and our financial assessment. Ashley, please go ahead.

Ashley Wu -- Vice President of Finance

Thank you Mr. Dong, and hello, everyone. Following Mr. Dong's remarks, I will start with an update on our content enrichment and diversification initiatives.

Esport is at the core of our content ecosystem and we have been committed to bring more high-quality and popular esport content to game enthusiasts. During the third quarter, we broadcasted 131 third-party esport tournaments, generating total viewership of 590 million. LPL Summer, Honor of Kings World Champion Cup, and LCK Summer were among the most watched events in the third quarter. Our exclusively broadcast comprehensive regional tournaments, including National Electronic Sports Tournament and Esports Championships East Asia were also welcomed by users.

Although some key license events were temporarily delayed during the season, we added more professional, comprehensive content in comparison with last year's schedule. In the third quarter, we broadcasted 58 self-produced esport tournaments and entertainment PGC shows. And total viewership reached 142 million, growing over 40% year over year. Among the esport tournaments that we produced, the HUYA All-Star Cup, Huya [Foreign language] has become a signature event for Peacekeeper Elite.

In this event's summer season, we invited top professional players and well-known broadcasters from multiple livestreaming platforms in China, as well as several international teams to team up and compete, making it especially popular. During this period, we also hosted the World Cup [Foreign language] for CrossFire Mobile, CrossFire HD, [Inaudible], and Naraka Bladepoint, all of which further complement the content for those game titles already on the Huya platform gaining even more traction with game lovers. Notably, our [Foreign language] cup for LOL [Foreign language] held in August quickly attract users' attention before the formal launch of this much anticipated game. In addition, during the period of HOK World Champion Cup, we produced the complementary program [Foreign language] integrating professional gameplay analysts with variety show.

It is the first of its kind for this HOK tournament. We believe it was a success, attaining a viewership of over 12 million during the third quarter. On the entertainment TGC program front, our long-standing GodLie Season 6, [Foreign language], a werewolf game show, and Huya Kungfu Carnival Season 5, [Foreign language], a mixed martial arts competition, continues to be the top performing show. In September, we introduced Huya Music Pub, [Foreign language], our first music scene invests into real program.

This program invites well-known musicians to share their stories, further enriching our pan-entertainment offerings. We continue to strengthen our efforts for videos by encouraging streamers to also become video content creators. In addition to the popular video-on-demand format, the video carousel format, [Foreign language], which supports ongoing [Inaudible], is also well-liked on our platform as it use livestreaming user habits. In the third quarter, average MAUs who watch videos on our platform increased to approximately 14 million, representing quarter-over-quarter growth of 30%.

Moving on to our international expansion progress, the average MAUs of Nimo TV, our overseas game livestreaming platform, increased to more than 28 million in the third quarter. And the overseas revenues are just over 200% year-over-year growth. The sequential user growth was mainly driven by certain regional esport tournaments, particularly in Southeast Asia. As we continue to deepen our relationship with local content providers and game companies, we are also refining our cooperation with local agent talents for more sustainable and healthy future revenue growth.

Next, I will walk you through our financial highlights. In the third quarter, our total net revenues were approximately RMB 3 billion, up 6% year over year. Our livestreaming revenue were RMB 2.6 billion in the quarter, a slight decrease from the same period last year, primarily due to lower average spending per paying user of Huya Live, partially offset by the increase in the overseas livestreaming revenues. The number of paying users for Huya Live reached 6 million, which is flat compared with the same period last year.

Nevertheless, our paying user numbers improved compared with the second quarter and were in line with our mobile MAU expansion trends. The usual low spending from newly active playing users has resulted in a lower ARPPU in the third quarter. Advertising and other revenues increased by 137% year over year to almost RMB 374 million in the third quarter, primarily driven by revenues from content licensing. Profit levels in the third quarter were impacted as we set up investment in our content.

Our non-GAAP gross profit was RMB 516 million, non-GAAP gross margin was 70.3%. Our non-GAAP operating profit was RMB 154 million, and our non-GAAP operating margin was 5.2%. Our non-GAAP net profit was RMB 180 million with a non-GAAP net margin of 6%. Now, moving on to our financial details, unless otherwise specified, the growth rates, I will be reviewing are all on year-over-year term.

Cost of revenues increased by 12.6% to RMB 2.5 billion for Q3, primarily attributable to the increase in revenue-sharing fees and content costs. Revenue sharing fees and content costs increased by 16.3% to RMB 2.12 billion for Q3, primarily due to the increase in revenue sharing fees in relation to certain broadcaster incentive programs and the increase in spending on esport content and content creators. Bandwidth cost decreased by 14.2% to RMB 178 million for Q3, primarily due to improved bandwidth cost management and continued technology enhancement efforts. Gross profit decreased by 18.8% to RMB 504 million for Q3, primarily due to the increased cost of revenues, driven by higher revenue sharing fee and content costs.

Gross profit was 18 -- 16.9% for Q3. Research and development expenses increased by 12.9% to RMB 206 million for Q3, primarily attributable to increased personnel-related expenses. Sales and marketing expenses increased by 59.5% to RMB 229 million for Q3, primarily attributable to increased marketing expenses to promote the company's content, products, services, and brand name, particularly including promotional activities for esports events in cooperation with various marketing channels during the summer vacation. General and administrative expenses decreased by 32.6% to RMB 80 million for Q3, primarily due to lower share-based compensation expenses.

As a result, operating income decreased by 62.7% to RMB 83 million for Q3. Operating margin was 2.8% for Q3. Interest and short-term investments income were RMB 63 million for Q3, compared with RMB 76 million for the same period of 2020, primary attributable to decreased interest rates. Income tax expenses decreased by 90.9% to RMB 41 million for Q3.

Share of income in equity master investments, net of income taxes was RMB 379 million for Q3 compared with RMB 0.2 million for the same period of 2020, primarily attributable to the investment income related to a disposal equity investment. As we disclosed in July this year, a private equity fund that Huya invested in as one of the limited partners enter into a definitive agreement to sell its minority stake in a gaming company. Net income attributable to HUYA Inc. was RMB 524 million for Q3 compared with RMB 253 million for the same period of 2020.

Non-GAAP net income attributable to HUYA Inc., which excludes share-based compensation expenses and gain on fair value change and disposal of equity investments, net of income taxes, was RMB 180 million for Q3 compared with RMB 361 million for the same period of 2020. Diluted net income per ADS was RMB 2.17 for Q3. Non-GAAP diluted net income per ADS was RMB 0.75 for Q3. As of September 30, 2021, the company has cash and cash equivalent, short-term deposits, and short-term investments of RMB 11.12 billion compared with RMB 10.74 billion as of June 20, 2021, primarily attributable to a cash inflow from the equity investment disposal mentioned above.

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

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes 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 from my side. The first question is, can management comment about the performance of S 11? And number two is about our expectation with regard to the user trend as well as the revenue expectation. Thank you.

Rongjie Dong -- Chief Executive Officer

[Foreign language] The S11 actually took place last weekend, and we are more than happy to see that this event has caused sensational outcomes in the world of games. And we are very happy to see that another LPL team entered into the final and got the title in the end. And we believe that the influence of this event is expanding. [Foreign language] We're very happy to see that during this whole S11 period, Huya had continued our lead in the market shares.

[Foreign language] During this event, Huya had sought a number of new records made for the viewership, especially for PCUs. This year actually is two times of that from the last edition. And it has also recorded as the highest PCU for Huya platform and its history. [Foreign language] During this tournament, we had launched operational activities together with Tencent, and also we launched a mobile game based on the tournament.

Both of those activities have delivered very nice results. And we will continue to improve our livestreaming technologies to optimize the viewer experiences. The penetration rate of Huya and this event actually is the highest during the past 3 editions.

Ashley Wu -- Vice President of Finance

[Foreign language] Now, Ms. Wu will talk about the users and revenue expectations in Q4 and next year. So overall speaking, we expect our users to grow continuously, and despite some seasonality changes, we believe that our investment in the content will help us to grow our viewership. And also, we expect some very positive impact from most recent new mobile launch -- new game launches, as well as tournament events.

[Foreign language] New games have always been an important source for our users. And winning the title for S11 this time and also becoming -- for esports becoming an official item in Asian games will both create very positive impact for our viewers and will help us to enter into a wider audience's population. So for the longer term, we believe that our potential user growth will have -- will continue to increase. [Foreign language] In terms of revenue, we believe that revenue to some extent is under the impact of the micro environment, as well as livestreaming sector as a whole.

So our target is to keep a higher-than-average growth pace and continue to grow in years to come. [Foreign language] That's it. Next question, please.

Operator

Thank you. Our next question comes from Yiwen Zhang from China Renaissance. Please go ahead.

Yiwen Zhang -- China Renaissance -- Analyst

[Foreign language] Thanks for taking my question. I have two question regarding LoL mobile. Firstly, it's exactly one month [Inaudible]. Can you share more color on the new users from this title? And I guess if we make a reference to Honor of Kings and also [Inaudible].

What is that gap between [Inaudible] and a user coming into our platform? And then, secondly, can you discuss the preparation we made for LOL mobile, including the stream requirement and also our self-organized tournament. And additionally, how much incremental content cost do you expect to incur? Thank you.

Rongjie Dong -- Chief Executive Officer

[Foreign language] You're right by saying that LOL mobile was launched about one month ago, and the Huya platform continued to take this significant market share. And right, now the user or viewership performance is better than other games, such as PUBG. But of course, we will continue to monitor the performances going forward. [Foreign language] This LOL Mobile is by no means replacing the users for LOL PC or HOK.

Therefore, we have the right confidence of gaining more viewers and users from livestreaming for this mobile game. [Foreign language] In preparation for the launch of this game, we've done a lot of things in operation. For instance, we had signed some livestreamers, as well as our working together with talent agencies in preparation for the launch. [Foreign language] Since the launch, we had organized a number of tournaments and events in order to give opportunities for our livestreamers, you know, make their shows and make exposures.

We have now assigned over 1,000 streamers and also had signed a number of professional teams. [Foreign language] Going forward, we would consider acquiring licensed tournaments in China for domestic leagues, as well as the other key important tournaments on top of organizing our own tournament events.

Hanyu Liu -- Investor Relations

OK. Next question, please.

Operator

Thank you. Next question comes from Lei Zhang from Bank of America Merrill Lynch. please ask a question.

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

Hi. [Foreign language] Two questions here. First is on margin trend. Can you give us more color on margin trend, especially any change in revenue sharing costs and net content costs? And secondly, wondering your updates on your strategy about esports tournament and how should we think about the tournaments-related costs in the future? Thank you.

Ashley Wu -- Vice President of Finance

[Foreign language] In order to improve our competitiveness and better serve our users, we had step up our effort in putting more resources in content since Q3, including by making more investments for our content creators as well as the self-produced, high-quality content, and licensed tournament content as well. In terms of revenue sharing with our livestreamers, in order to improve our competitiveness while maintaining the basics of revenue sharing mechanisms unchanged, we will also address and trying to give more incentives for the livestreamers according to the market dynamics. [Foreign language] In terms of margin levels, well, there's some seasonality changes according to the scheduling of our operational events, as well as the tournaments, especially in Q4, the [Inaudible] 42:09, because there are a number of big events toward the end of the year. And also, there are some [Inaudible] of events and tournaments, such as S11 auto plays in Q4.

So that has generated some impact on our tournament costs and also the operation costs with regards to contents.

Rongjie Dong -- Chief Executive Officer

[Foreign language] So Mr. Dong will take the question with regard to our tournament and its IP cost. Well, actually, we believe that esports will continue to be very popular in a few years to come, especially with the S11 final title, as well as Asian games. So we believe that the costs for top-tier tournaments will probably go higher in the future.[Foreign language] On the other hand, for some long-tail tournaments or new tournaments really depend on the promotion of livestreaming platforms.

So the costs for these kinds of events will probably be quite flattish. On the other hand, we also noticed that self-produced content is also a very important source of content for Huya. [Foreign language] So for self-produced content as well as our own esports tournaments or event -- our entertainment event, we believe that this kind of content creates a better value for money. And it's quite unique to our platform.

So we will continue to invest in this kind of areas, and we hope to raise the percentage points from the current level to around 10% to 20% in years to come.

Hanyu Liu -- Investor Relations

OK. Next question, please.

Operator

Next question comes from Ritchie Sun from HSBC. Please go ahead.

Ritchie Sun -- HSBC -- Analyst

[Foreign language] So I will translate the questions myself. So firstly, I want to ask about the competitive landscape dynamic. How has that been trending? And without M&A and also ongoing intense competition, how should we think about the long-term net margin level for the platform? Second question is, can you share about the progress made in game video? You mentioned the MAU of 40 million. So what about the user time spend, retention, as well as monetization plan? Thank you.

Rongjie Dong -- Chief Executive Officer

[Foreign language] Mr. Dong on the question of competition landscape. Well, since we are not joining hands with DouYu and became competitors again, we believe that in recent quarters, the overall competition landscape for a game livestreaming does not change a lot. Compared with DouYu, I think we have a much better, you know, operational efficiencies and we have outperformed in terms of, like, users, as well as our revenues.

[Foreign language] Even though our peers are making more and more investment in livestreaming for esports, however, we are a professional platform for esports, and we rely on our core competitiveness and continue to strengthen our positioning in this regard. [Foreign language] As I said before, we will continue to gain our market share and also to keep strengthening our advantages in livestreaming for esports. And over time, as we are accumulating more and more professional know-hows and experiences in running esports, we would love to have a more diversified business models and by relying on self-produced content, for instance.

Ashley Wu -- Vice President of Finance

[Foreign language] Ms. Wu on the question of video content production. Well, actually, for videos, the user actually had increased. Since Q3, our MAU reached 40 million compared with the previous quarter of Q2, there is an increase of about 30 %.

We believe that video business is a natural extension to the livestreaming business that we have. A lot of video content originated from the events, tournaments, basically about editing and reproduction of the livestreaming contents. I think one of our biggest advantage in this regard is that we have abundant resources in terms of content origins, and we have a very good ability of editing and reproducing them into videos. In terms of the video content production, we encourage livestreamers and talent agencies to make content -- to make video content.

And in terms of the products, we have launched a lot of new features. For instance, we have this highly efficient editing features, and we can use AI technology to identify the key moments and points and generate our video clips are automatically. So this is a very positive feature that we have for producing content for videos.

Hanyu Liu -- Investor Relations

OK. We can have the next question. Thank you.

Operator

Thank you. Next question comes from Brian Gong from Citi. Please ask your question.

Brian Gong -- Citi -- Analyst

[Foreign language] I will translate myself. Can management share your latest view on the impact from the regulation of gaming and game livestreaming toward our operations and the fundamentals? And is there any change to our strategies post the latest regulation? Thank you.

Ashley Wu -- Vice President of Finance

[Foreign language] Thank you. As you rightly pointed out that in recent months, our industry has received quite a lot of attention from the regulators. And we believe the purpose of doing that is to better regulate the industry and to promote a healthy long-term growth. We've been keeping an eye on the latest regulatory changes and to make sure that our business operation is in full compliance with those regulations.

Even though there will be some short-term changes in terms of the revenue or user-based growth because of the regulatory changes for the short term, but we believe that for the longer term, we would be agile enough to mitigate the impact on our business and to actively address our product and operations to make sure that we can cater for the demands of the users and also at the same time be compliant. [Foreign language] That said, we will continue to invest in high-quality content production to upgrade our products, as well as to consolidate our competitiveness of the business as a whole. And for the longer term, we believe that this will help us to better serve our clients and generate long-term value. Thank you.

Operator

Thank you. Our final question today comes from Tian Hou from T.H. Capital. Please go ahead.

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

[Foreign language] So just want management give some color on your overseas business development, as well as your plan or some thoughts about the cooperation with Tencent going forward. Thank you.

Ashley Wu -- Vice President of Finance

[Foreign language] Thank you, Ms. Hou, on overseas Nimo TV business. Well, thanks to the tournaments in overseas, as well as local operational activities, our MAU in overseas market reached 28 million, and especially we had a very stellar performance in the market of Indonesia. And our revenue from overseas market also continued to increase by over 200 percentage points year over year.

[Foreign language] Our main strategy going overseas is to continue to use the local partners to cultivate our overseas markets and to expand our user base, and to enhance our monetization ability. [Foreign language] Since this quarter, we are redefining our cooperation with local talent agents and keep optimizing our cooperation with them. We believe that this will be positive for a healthy ecosystem building for the overseas market. [Foreign language] We believe that for the short term, the overseas market will continue to be in the investment stage.

But the loss in overseas markets as a percentage points to margin level will continue to be lowered. [Foreign language] So with our rate -- our cooperation with Tencent, we truly hope that we can continue to deepen our cooperation with Tencent and our businesses, especially in an area of games, has been quite close. [Foreign language] This year, we had launched some new features, such as gift dropping or one-click to join the broadcasters play games [Foreign language]. These are to improve the interactivity of the livestreamers and its users.

And we had first launched such interaction features in games by Tencent, such as PKE and others. And both from our side and from the game side had seen very nice outcome. [Foreign language] In terms of a tournament, we had a long-term relationship with Tencent, for instance, by signing a five-year agreement of cooperation for LPL. And this will help us to explore new ways of monetization.

Hanyu Liu -- Investor Relations

OK. That's it.

Operator

All right. Thank you. I would like to turn the call back to the company for closing remarks.

Hanyu Liu -- Investor Relations

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 TPG Investor Relations. Thank you.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

Hanyu Liu -- Investor Relations

Rongjie Dong -- Chief Executive Officer

Ashley Wu -- Vice President of Finance

Thomas Chong -- Jefferies -- Analyst

Yiwen Zhang -- China Renaissance -- Analyst

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

Ritchie Sun -- HSBC -- Analyst

Brian Gong -- Citi -- Analyst

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

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