Huya (NYSE:HUYA), a leading Chinese video live-streaming platform backed by Tencent Holdings (OTC:TCEHY), announced solid corporate earnings results on Wednesday for the third quarter (ended Sept. 30, 2020). Revenue jumped 24% (in constant currency) year over year while net income surged 105% (in constant currency) on the backs of more paying users and stronger average spending per user.

That was the top-line take on the financial release. Here are three important takeaways that investors should make note of from this earnings report.

1. Profits surged on higher margins

Huya reported a solid result as a whole, with revenue growth across its live-streaming segment (up 23% to 2.7 billion renminbi) and advertising income (up 45% to 158 million renminbi). Similarly, operating metrics came in stronger across the board, with monthly active users (MAUs) growing 18% to 173 million and paying users up 13% to 6 million. 

A man holds his head in his hands in front of a computer game.

Image source: Getty Images.

Operating profit came in even stronger, growing 249% year over year to reach 223 million renminbi, which was a result of margin expansion (operating margin more than doubled from 3% to 8%). This also indicates that Huya's business has reached its critical mass, which allows the company to benefit from operating leverage.

As it continues to scale its business, Huya is well-positioned to improve its margins and its profitability over time. Hence, it won't be surprising to see it grow profits at a higher rate than revenue over the next few quarters.

2. Overseas business gaining traction

Historically, Huya has always focused on solidifying its position in its domestic market, and that contributes to its leading position in the Chinese video live-streaming market.

Two years ago, the entertainment company started its overseas business under Nimo TV, focusing mainly on serving the Southeast Asia and Latin America markets. Though it's still early days, Nimo TV has demonstrated some good progress. MAUs reached 30 million in the third quarter (up from 24 million in the first quarter) as the company "introduced more e-sports tournaments, attracted more broadcasters and deepened our relationship with local game developers," according to management.

Though this part of the business has yet to contribute much toward Huya's income, the growing MAUs indicate that Nimo TV is capturing the interest of its overseas customers. As Huya continues to grow this ecosystem -- with more esports content, broadcasters, and users -- it's only a matter of time before that money flows in.

3. Update on Huya and Douyu's merger

Last month, Huya announced that it will acquire its main rival DouYu International Holdings (NASDAQ:DOYU) to create a dominant video live-streaming company with more than 300 million users and 80% of esports market share. Tencent, the parent of Huya, will own nearly 68% of the combined company. As part of the merger, Huya will pay $200 million of cash dividends to shareholders around the closing date of the merger, which is expected during the first half of 2021.

Huya CEO Rongjie Dong said in the third-quarter release: "We are also excited about the opportunities that lie ahead of us with the potential merger with DouYu. We believe the potential combination will allow us to build on our complementary strengths, achieve significant synergies, and create more value for our users, our business partners, and our shareholders."

The merger makes a lot of sense, since it not only allows the combined company to reap cost and revenue synergies, but also gives Huya the necessary scale to compete against upcoming rivals like Bilibili, Douyin, and Kuaishou. It also cements the relationship between Tencent -- the largest game company in China -- and the two leading video live-streaming platforms in China to create a dominant force in the emerging esports industry.

Though there's no guarantee that the merger will be successful, it's comforting to know that Tencent is the main driver behind this transaction and will take the necessary actions to ensure the deal is a success. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.