HUYA (HUYA) Q2 2023 Earnings Call Transcript

HUYA (HUYA -0.68%)
Q2 2023 Earnings Call
Aug 15, 2023, 8:00 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 2023 earnings conference call for Huya Inc. At this time, all participants are in a listen-only mode. Today's conference call is being recorded.

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

Hanyu Liu -- Investor Relations

Hi, guys. Can you hear us?

Questions & Answers:

Operator

Hello. This is the operator. Yes, I can hear you.

Hanyu Liu -- Investor Relations

OK. Then we will use this line. Should we start?

Operator

Yes, please start. You may begin.

Hanyu Liu -- Investor Relations

Hello, everyone, and welcome to Huya's second quarter 2023 earnings conference call. The company's financial and operational results were issued earlier today and are posted online. You can also view the earnings press release by visiting the IR website at ir.huya.com. A replay of the call will be available on the IR website in a few hours.

Participants on today's call will be Mr. Songtao Lin, chairman of Huya; Mr. Junhong Huang, acting co-CEO and the senior vice president of Huya; and Ms. Ashley Wu, acting co-CEO and the vice president of finance.

Management will begin with prepared remarks, and the call will conclude with the 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 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 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 chairman, Mr. Songtao Lin.

Please go ahead. Sorry. Can you hear us? Because there are some technical issues, I will help you deliver the remarks from our chairman.

Unknown speaker

Can you hear?

Hanyu Liu -- Investor Relations

Yeah, we can hear now. Yeah, please proceed.

Songtao Lin -- Chairman

Hello, everyone. Thank you for joining our conference call today. It's my pleasure to participate in Huya's earnings call for the first time and to speak with all of you. Huya celebrated its seventh anniversary last week, a remarkable milestone in this industry.

Since I assumed my role as Huya's chairman in May, I have conducted a comprehensive review of the company's business strategies with the company's management and business operations teams. As a leading game livestreaming platform, Huya has served a large number of games, including as content creators and partners in the industry value chain since its inception. Now, we aim to build on Huya's success and experience to expand the company's role in the game industry. We will be exploring more opportunities that complement Huya while it establish user community and the content ecosystem to drive long-term sustainable business development.

We shared a brief strategy update with you earlier this month, and we'd like to take the opportunity today to elaborate on our latest plans. Given Huya's proven track record in the game livestreaming market and close collaboration with industry partners, we are well-positioned to achieve these new goals. As the company enters a new phase of development, I am confident that our upgraded vision will promote sustainable vitality and propel Huya's future growth. Now, I would like to turn the call over to our acting co-CEO and SVP, Junhong Huang, to discuss our strategies in greater detail.

Thank you.

Junhong Huang -- Acting Co-Chief Executive Officer and Senior Vice President

OK. Thank you, Mr. Lin, and hi, everyone. I'm glad to speak with you today.

To expand on our chairman's remarks, let me share some specifics about Huya's current key objectives with respect to our new strategy. First, we plan to shift our commercialization focus going forward, exploring and increasing our users' value by integrating more game-related service into our platform. Since Huya's inception, we have largely monetized our user base through our livestreaming service, which primarily generate revenue by commissioning users' visual gift pay to broadcasters. Converting regular users into paying users involves a relatively long process under our current core model, and conversion efficiency has yet to be improved.

However, as most of you know, a significant part of our users are also gamers. And based on our surveys and insights, the active gamer user on Huya Live are willing to spend both on gameplay and related in-game purchases. Also, the proportion and amount of in-game spending by these gamer users tend to be higher than that of general gamers. Our rich game and esport content offerings have already satisfied our gamer users' content consumption needs, and we believe we can further capture this user group's commercial value by meeting their broader game-related needs with expanded service models such as game distribution, in-game item sales, and game advertising.

Let's take in-game item sales as an example. We have previously held several successful in-game sales of game tools, but these were one-time events that functions mainly as marketing and promotional activities for those games. Going forward, we plan to regularize in-game item sales and establish a recurrent cooperation mechanism with various games to meet user's ongoing demand for in-game purchase of skins, weapons, and other items, especially when user watch -- broadcasters utilize these items during live games played on Huya. In addition to boosting monetization for our platform, this new service offering will provide additional channels for game publishers to promote their in-game products and expand our broadcasters' income streams.

We are currently discussing commercial terms for this type of cooperation with an array of game studios and are looking forward to future partnerships with additional games. Furthermore, the technical support required to implement this business is already in place. Earlier this month, we completed development of our in-game item more function, which will be embedded into certain of our live channel's yellow shopping cart items. Once again, users find their game account with their Huya's account.

They can seamlessly buy in-game item when watching livestreaming content or use in related games. According to our plan, we will implement the function on small scale soon. Another priority is to expand income streams for our content creators and optimize our content cost structure. At present, our broadcasters' income mainly consisted of the sign-on fee we provide and their share of visual gift revenue.

For many game broadcasters, the relatively fixed sign-on fee is a major source of income. As we explore and develop a wider range of game-related services, we will work to optimize our content creators' income structure by enabling them to earn a greater share of game-related service revenue, including revenues from in-game item sales, game distribution, and advertising, among other service. Diverse income streams will also increase Huya's value proposition to content creators, attracting more broadcasters and their fan bases to our platform. We believe this adjustment to our content cost structure will boost the broadcasters' financial rewards while better aligning our content cost with our revenue.

To effect this transformation, we will first harness various technologies to upgrade the technical infrastructure required for our new service and products. As I mentioned above, our in-game item more function is already well underway. We also plan to upgrade interest tags across our live platform, which will allow users to earlier identify in-game items meeting their personalized needs, as well as to discover new games or other content catering to their interests. In embracing the latest tech trend, we plan to actively explore the application of AI technologies, including large language model and AIGC, to capture user interest chains, too, and help create more engaging interactive content and experiences.

In addition, we will further enhance our comprised capabilities by continuously investing in advanced technologies, including in AI-powered content monitoring system, to minimize operational risk and sustain a healthy community atmosphere on our platform. We are proactively restructuring several aspects of our business for a more targeted allocation of internal resources to advance our strategic transition toward a more balanced and sustainable development pathway. To that end, we are planning to scale back certain less cost-effective livestreaming features, as well as financial incentives for livestreaming revenue-generating campaigns and the proportion of our fixed spend on broadcasters. Although this adjustment may result in fluctuations in our operational and financial metrics in the near term, we believe our market-leading position and strong execution capabilities will support our pursuit of long-term profitability improvement.

Our primary goal is to increase our game-related service revenues to approximately 30% of total net revenues within three years, creating a more balanced and diverse revenue mix to strengthen our foundation for long-term success. We are confident these transformation initiatives will empower our sustainable growth as we remain committed to serving the needs and interests of more users, content creators, and industry partners. With that, I will now turn the call over to our acting co-CEO and VP of finance, Ashley Wu, to share more details on our second quarter results. Ashley, please go ahead.

Ashley Wu -- Vice President, Finance

Thank you, Junghong, and hello, everyone. I'll provide some updates on our operating metrics and financials for the second quarter of 2023. On the user side, Huya Live mobile MAUs reached 82.9 million in the second quarter, compared with 82.1 million in the first quarter and 83.6 million for the same period last year. The slight sequential improvement was mainly attributable to the increased esports content and entertainment programs we offered in the quarter, with the new game launches also enriched the platform's game content.

Meanwhile, users' and broadcasters' time spent on offline entertainment activities continued to affect us to some degree, especially given several shop public holidays during the quarter. Overall, we maintained a stable user scale in the second quarter with the next month's user retention rate staying above 17%. Now, the content side. In terms of licensed esports events, we forecasted around 75 party professional esports tournaments in the second quarter of 2023, attracting a viewership of approximately 490 million.

We broadcasted a higher number of events in Q2 than in Q1 as more tournaments were scheduled, but fewer events than in the same period of last year as we continue to implement stricter content procurement policies. Domestic professional leagues for major game titles such as the LPL Summer, KPL Spring, and CFPL Summer continued to deliver strong performances. Also, both the LoL Mid-Season Invitational and the CS:GO BLAST Paris Major proved very popular. In June, we forecasted Valorant Master Tokyo, a tournament featuring professional teams from China and around the world.

Given the timing of these major events just before the official China launch of Valorant in July, it's attracting attention from our users and serve as an engaging teaser for this new game on our platform. Currently, Valorant is gradually cultivating its streamers and core audience on Huya, and we expect to offer more related content, including self-organized tournaments, as its domestic esports this system develops. We also broadcasted more than 30 self-organized esports tournaments and entertainment PGC shows in the second quarter, with a total viewership of approximately 100 million. For self-produced content, we aimed to create a matrix of high-quality in-house IPs.

The new seasons of our Huya-branded All-Star Cup for Peacekeeper Elite and Summer Cup for Honor of Kings were among our most-watched events during the quarter. After multiple seasons, the Thunder series has become one of the most influential IPs for HoK tournaments on our platform, alongside the official KPL competitions. During the CS:GO BLAST Paris Major event, we conducted our commentary program, [Foreign language] Major, live from a studio in Paris, winning rates from the tournament's audience and increasing our user community's interaction with the event. In addition, we held the eighth season of Huya Kung Fu Carnival during the quarter, extending this long-running program's popularity.

It's also worth mentioning that we recently leveraged its success to launch a series of Carnival-type programs, integrating both offline and online activities such as Basketball Carnival and Billiards Carnival, capitalizing on the growing demand for entertaining sports content. In line with our new strategies, we will continue to focus on developing our user community and enhancing our content ecosystem across user-generated content, professional user-generated content, as well as licensed and self-produced professional programs. We are confident that our high-quality content and superior user experience will continue to support our business transformation. In terms of financial performance, we achieved total net revenue of RMB 1.82 billion and non-GAAP net profit of RMB 115 million for the second quarter of 2023.

Despite the year-over-year revenue decrease, amid a challenging macro and regulatory environment, we continue to make progress in optimizing costs and expenses. In Q2, our gross margin improved both year over year and quarter over quarter, primarily driven by savings in content costs as we continue to scrutinize content-related spending, particularly content licensing and broadcaster-related costs. Along with the efficiency gains we maintained, we further narrowed our operating loss with a non-GAAP operating loss of approximately RMB 2 million in the second quarter. Let's move on to our Q2 financial details.

Our total net revenues were RMB 1.82 billion for Q2, a decline from RMB 2.28 billion for the same period last year. Livestreaming revenues were RMB 1.72 billion for Q2, compared with RMB 2.05 billion for the same period last year, primarily due to a decrease in the number of quarterly paying users of Huya Live to 4.6 million for the second quarter of 2023 from 5.6 million for the same period of 2022. The decline in the number of quarterly paying users was primarily attributable to the soft macro and industry environment, as well as the increase in offline entertainment activities, which affected the time spent by long-tail users on our platform. Advertising and other revenues were RMB 106 million for Q2, compared with RMB 223 million for the same period last year.

This was primarily due to a significant decrease in content licensing revenues. If we exclude the impact of the reduction in content licensing revenues as a result of our amended licensing agreements for LoL metrics in January, the remaining portion of advertising and other revenues recorded single-digit growth year over year. Cost of revenues decreased by 25% year over year to RMB 1.55 billion for Q2, primarily due to decreased revenue sharing fees and content costs, as well as bandwidth costs. Revenue sharing fees and content costs decreased by 24% year over year to RMB 1.34 billion for Q2, primarily due to the decrease in revenue sharing fees associated with the decline in livestreaming revenues and lower costs related to esports content, as well as content creators.

Bandwidth costs decreased by 34% year over year to RMB 101 million for Q2. This was primarily due to improved bandwidth cost management and continued technology enhancement efforts. Gross profit was RMB 273 million, and gross margin was 15% for Q2. Excluding share-based compensation expenses, non-GAAP gross profit was RMB 278 million and non-GAAP gross margin was 15.3% for Q2.

Research and development expenses decreased by 14% year over year to RMB 144 million for Q2, primarily due to decreased personnel-related expenses. Sales and marketing expenses increased by 6% year over year to RMB 106 million for Q2, primarily due to increased promotional fees. General and administrative expenses decreased by 9% year over year to RMB 75 million for Q2, primarily due to decreased personnel-related expenses and share-based compensation expenses. Other income was RMB 24 million for Q2, compared with RMB 50 million for the same period of 2022, primarily due to lower indirect tax refunds and government subsidies.

As a result, operating loss was RMB 29 million for Q2, compared with RMB 81 million for the same period of 2022. Interest and short-term investments income was RMB 125 million for Q2, compared with RMB 66 million for the same period of 2022, primarily due to increased interest rates and improved management of deposit products. Net income attributable to Huya Inc. was RMB 24 million -- 23 million for Q2, compared with a net loss attributable to Huya of RMB 19 million for the same period of 2022.

Excluding the share-based compensation expenses and impairment loss of investments, non-GAAP net income attributable to Huya Inc. was RMB 115 million for Q2, compared with RMB 6 million for the same period of 2022. Non-GAAP net income margin was 6.3% for Q2. Diluted net income per ADS was RMB 0.09 for Q2.

Non-GAAP diluted net income per ADS was RMB 0.47 for Q2. As of June 30, 2023, the company had cash and cash equivalents, short-term deposits, and long-term deposits of RMB 10.8 billion, compared with RMB 10.3 billion as of March 31, 2023. Before we conclude, I am pleased to announce that Huya's board of directors has approved a share repurchase program, under which the company may repurchase up to USD 100 million of its ADSs or ordinary shares over the next 12 months. I believe this move further deepens our commitment to building long-term value for our shareholders.

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

Operator

Thank you. [Operator instructions] Your first question comes from the line of Thomas Chong from Jefferies. Please go ahead. Your line is open.

Thomas Chong -- Jefferies -- Analyst

[Foreign language] Thanks, management, for taking my questions. My first question is about our new strategies. Can management give us more details about implementation? And secondly, talking about the target for our new strategies, are there any short, medium, and long-term targets that we can share? Thank you.

Junhong Huang -- Acting Co-Chief Executive Officer and Senior Vice President

OK. [Foreign language] Based on Huya's existing user community and content ecosystem, we hope to further enhance the commercialization of game content and strengthen the industrial linkage, bring new breakthroughs to Huya and improving our position in the game market and develop long-term opportunities in the game value trend and promotes the long-term sustainable development of the business. And our main goals and plans includes the following points. [Foreign language] We shift the focus of commercialization toward game-related services such as game distribution, game item sales, and game advertisements so as to deeply explore the commercial value of game users.

This is based on our significant gamer population. Although our users are willing and able to spend money on games, their related consumption on Huya platform has been very limited due to our previous business model. And therefore, we plan to provide more game-related services by strengthening cooperation with the upstream game studios and broadcasters. This cannot only meet the needs of the gamers to buy in-game items and discover and download new titles when watching live games but also bring additional revenue channels for game manufacturers and increase the value revenue stream for broadcasters, which is beneficial to all the parties in the industry chain.

[Foreign language] At the same time, we strive to optimize the income structure of content creators on our platform and expand the income sources for broadcasters other than virtual gift, revenue sharing, and sign-on fees and let the broadcasters get more income from the sales, distribution, and advertising of game items. This is also conducive to enhancing the relevance between Huya's content cost and income and reducing the fixed sign-on fee costs and improve the efficiency of the content cost we expand. [Foreign language] At this stage, we're mainly engaged in the infrastructure building for our new business, including the creation of functions and products needed to provide game-related services, and also negotiating commercial terms with relevant game studios and publishers. Earlier this month, we basically completed the development of the function of in-game item sales more and plan to activate the process of in-game item sales and game distribution this year and make them available on several games.

Therefore, this part of business is expected to have a relatively small scale of income in the year 2023. At the same time, we're also making some adjustments to the live broadcast monetization business to reduce some inefficient resource investment. [Foreign language] And next, we will expand game-related services to more games, including mainstream games and potential new titles, and further optimize the user experiences. And our goal is to continuously increase the revenue proportion of game-related services in the next three years and strive to achieve a more balanced income structure for the company as a whole, by which we mean that we hope to make this part of game-related services income as about 30% of the total income.

Hanyu Liu -- Investor Relations

Well, thank you. Let's have the next question, please.

Operator

Thank you. We will take our next question. Your next question comes from the line of Daniel Han from UBS. Please go ahead.

Your line is open.

Daniel Han -- UBS -- Analyst

[Foreign language] Let me translate myself. The company is going through a major strategic transformation. Given this, what is the outlook for the revenue and margins in the second half of this year? Thank you.

Ashley Wu -- Vice President, Finance

[Foreign language] In transforming our business, in order to mobilize and allocate internal resources in a more targeted manner, we have begun to actively adjust various aspects of our existing business. For example, we are reducing some inefficient live broadcast functions, adjusting the incentives for live broadcaster activities and the proportion of fixed sign-on fees. These adjustments may cause fluctuations in our operational and financial indicators in the short term, especially in the second half of this year, when the scale of the new business revenue is relatively small and the year-over-year decline of live broadcast business revenue may be larger than that in the first half of this year due to the impact of resource reallocation. So, this will have a more obvious impact on the overall revenue.

[Foreign language] At the same time, we'll continue to promote measures to reduce the cost and increase efficiency and adopt stricter control over expenditures. Although there will be some new investments such as further research and development and talent acquisition related to new businesses, we'll continue to be cautious about the content expenses such as copyrights and broadcasters, and we'll be cautious about channel promotion in terms of operating expenses. And in terms of the profit, we still maintain the expectation that the gross profit margin will increase for the whole year and the non-GAAP net loss will be narrower than that in 2022. [Foreign language] In the medium and long term, the GP margin of the game-related business is expected to be higher than that of the existing live broadcast business, with a bigger mix of high gross margin business revenue.

And because of the content cost related to broadcasters more closer to income, we expect the overall profit situation will be improved and be maintained sustainably.

Hanyu Liu -- Investor Relations

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

Operator

Thank you. We will take our next question. Your next question comes from the line of Lei Zhang from Bank of American Securities. Please go ahead.

Your line is open.

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

Hi. [Foreign language] Thanks, management, for taking my question. My first question is regarding the updates on the recent regulatory environment and any impact to our business. Secondly, how should we look at the performance of Tencent's newly launched game Valorant in our platform? Thank you.

Ashley Wu -- Vice President, Finance

[Foreign language] At present, the authority requirements on the content of a live broadcast platform, the behavior of broadcasters and users, and the protection of minors are becoming more and more standardized and systematic, and therefore, the overall management trend is also relatively standard and strict. We believe that the purpose is to better promote the standardization of the industry and promotes the benign and sustainable development. [Foreign language] As a leader in our industry, Huya has recently taken the initiative to upgrade and optimize the content and functions of our platform and refine the operational strategy and improve the efficiency and create a healthier platform environment. We will also continue to maintain a more standardized and healthy development model for the content on our platform to guide broadcasters and guilds to strengthen their compliance awareness and pay attention to improving the compliance capability on the platform through technical advancement.

Junhong Huang -- Acting Co-Chief Executive Officer and Senior Vice President

OK. [Foreign language] On the front of the new game, the livestreaming performances of the new games is relatively stable as a whole, and we also expect that the game itself continues to be popular. It will attract more audiences of live and derivative content. Huya provides launch incentives and traffic support for the launch of the new games and will also organize activities and provide some prop products together with the game companies and with weighted supports according to the different game characteristics.

[Foreign language] For example, Valorant [Inaudible] we have achieved a leading market share. And for this popular esports game, we'll focus on establishing its advantages in the content ecology of events. And in addition to the official copyright events, we will launch more self-organized events for this game, including events attended by the broadcasters and professional players to further enhance the activity of this game sector.

Hanyu Liu -- Investor Relations

OK. Thank you. Next question, please.

Operator

Thank you. We will take our next question. Your next question comes from the line of Yiwen Zhang from China Renaissance. Please go ahead.

Your line is open.

Yiwen Zhang -- China Renaissance Securities -- Analyst

[Foreign language] So, thanks for taking my question. So, with our commercialization focus shifting, what's our view of our content strategy? Do you have any change you plan to make? Thank you.

Junhong Huang -- Acting Co-Chief Executive Officer and Senior Vice President

[Foreign language] Our new strategic plan is deeply embedded in who we are as existing user groups and content ecology. The rich esports and game content on Huya helps to attract and maintain active core game users, which will also help to support our goal of providing more game services. OK. [Foreign language] The broadcaster content will continue to be an important part of content on Huya's platform, especially our new commercial forms such as game distribution, and prompt sales will also be achieved through cooperation with the broadcasters.

We'll also provide more detailed content operations for potential and promising broadcasters and help create more popular content by combining event commentary with daily content and digging deep into the game content. We will also bring technical support of products such as bullet chatting, interactive games, live interactive functions, and virtual live broadcast technologies. At the same time, this will help us to improve the application of AIGC, which will also help to enhance the diversity of the content presentation. [Foreign language] As for the content of copyright esports, we will also continue to implement cost reduction measures and cover the top-tier events of major games on the basis of cost performance evaluation.

As for the self-made content, due to its relatively high ROI, we will give more attention to self-made content and create high-quality self-organized IP metrics such as Huya Thunder series, Huya All-Star Cup, and Tianming Cup. Through our own events, we will also better absorb the user traffic from large-scale copyright events. [Foreign language] In addition, we'll continue to pay attention to the integration of live broadcast, video, game community, and other content forms and continue to bring user quality experiences. Thank you.

Operator

Thank you. There seems to be no further questions. Now, I'd like to turn the call back over 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 investor relations through the contact information provided on our website or Piacente Financial Communications. 

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Hanyu Liu -- Investor Relations

Unknown speaker

Songtao Lin -- Chairman

Junhong Huang -- Acting Co-Chief Executive Officer and Senior Vice President

Ashley Wu -- Vice President, Finance

Thomas Chong -- Jefferies -- Analyst

Daniel Han -- UBS -- Analyst

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

Yiwen Zhang -- China Renaissance Securities -- Analyst

More HUYA analysis

All earnings call transcripts