HUYA Q1 2024 Earnings Call Transcript

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May 13, 2024

There are 7 speakers on the call.

Operator

I am Hengyu Liu from Huya's Investor Relations. At this time, all participants are in lesson only mode. Please be advised that today's webinar is being recorded. 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.

Operator

Huya.com. A replay of the call will be available on the IR website in a few hours. Participants of management on today's call will be Mr. Junhong Huang, Weas acting's Co CEO and Senior Vice President and Ms. Ashley Wu, Acting Co CEO and Vice President of Finance.

Operator

Management will begin with prepared remarks and the call will conclude with a Q and 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.

Operator

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.

Operator

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. With that, am pleased to turn the call to our Co CEO and SVP, Mr. Huang. Please go ahead.

Speaker 1

Okay. Thank you, Han Yu. Hello, everyone. Thank you for joining our earnings conference today. We are pleased to deliver 1st quarter results featuring a healthy user base expansion, growth in game related services and a more stable overall revenue trend.

Speaker 1

We also improved our profitability with non GAAP net income reaching approximately RMB92 1,000,000. With 2024 off to a good start, I'd like to share some details about the year's key strategies and recent developments, including our strategic transformation and commercialization focus, content and platform ecology upgrades and technology and product advancements. Let me start with an update on our strategic transformation. We are making encouraging progress in the commercialization of our game related services, driven by the rapid growth of revenues from game distribution and advertising services as well as in game item sales. Our game related services, advertising and other revenues, formerly known as advertising and other revenues, reached RMB244 1,000,000 for the Q1, representing growth of 137.6 percent year over year and 30.7 percent quarter over quarter.

Speaker 1

This growth reflects a strong and engaged base of high value gamer users on our platform and validates our new direction's potential. In terms of game distributions, we are broadening our coverage to include more games, both upcoming and existing titles. Our gamer user tend to have high commercial value potential with users' average spending level through Huya's distribution channel performing well, particularly in the MMO and SLG categories. We are also refining our operations to capitalize on their value as we develop game distribution services. For in game item sales, we offer a diverse range of popular game props for a growing number of games.

Speaker 1

Additionally, we are expanding our offering of broadcaster customized in game virtual items to help strengthen connections between broadcasters and their fans. With regard to game advertising services, we are working with more game companies and carrying out innovative broadcaster promotion activities and campaigns. We are also actively preparing the upcoming launch of integrated DNF mobile game to seize related opportunities in game distribution and promotion. In addition to providing rich live streaming content and more comprehensive services related to this game for our users and the game studio, We will leverage this game to grow our game related service revenues. In addition, I want to point out that we typically recognize revenues from game distribution and in game item sales after revenue sharing with the game companies that is on net basis.

Speaker 1

That means game related services actual total transaction value is much higher than its revenue. Game related services strong and rapid growth this quarter reinforces our confidence that this business revenue will continue to scale. Also, as game related services tend to offer higher gross margins, This business should accelerate improvements in our overall gross margin and profitability as its contribution to total revenues increase. In the long term, this transformation will not only enhance our revenue mix, but could also enhance our revenue scale and profit levels. Turning to content and platform ecology, strengthening our cooperation with various platforms and products to enhance our platform ecology is a key strategy for us in 2024.

Speaker 1

In the Q1, we hosted the New Year's Esports All Star event in cooperation with 3 other major game live streaming platforms, featuring League of Legends, Honor of Kings and Peacekeeper Elite Competitions broadcast on multiple live streaming and content platforms. With an array of celebrities and popular broadcasters from each platform participating, The event was well received by users during the Chinese New Year period and went viral beyond the esports audience. Its success also marked a major breakthrough for the game live streaming industry in terms of content co creation. Through deep cooperation with our partners, we overcame platform barriers for the first time to mutually benefit from our complementary content. We believe this more open environment offers vast opportunities for Huya to create win win outcomes for platforms of all kinds.

Speaker 1

As an industry leader and barrier breaking pioneer, our goal is to become a central hub with seeing a more open content ecosystem. We are currently working with several live streaming platforms on professional generated content broadcaster cross platform streaming and commercialization. We also embracing the soft form video sector by bringing our video and live streaming content to these platforms. In Edison, as we further enhance our cooperation with Tencent Group, our high quality content is being featured on various products line within the Tencent ecosystem, such as WeChat channels, Tencent Video, QQ and array of game products, touching a wider range of users. Thus, initiatives like these, we believe we can better meet users' needs, increase the VR platforms influence and create future opportunities.

Speaker 1

Strategically, we are building a 3rd tiered pyramid of esports tournaments and event content. At the top, our licensed professional esports tournament, our extensive coverage of top tier licensed tournaments showcases our content quality, while helping us improve our event operations capabilities. The middle tier is our premium self produced events and programs, leveraging our leading position in the sports market and our abundant broadcaster and professional player resource, we are offering more and more influential self produced content. Finally, the bottom tier comprised esports events we recognize targeting massive participation from local communities, which also helped to broaden the audience for esports content. Asar will provide more details on our Q1 content activities later.

Speaker 1

In terms of technology and product advancements, we upgraded the Huya Live Mobile application to version 12 in February. This release features enhanced e sports information community content and game related service functions as well as a new dedicated event

Speaker 2

of

Speaker 1

Esports categories and upgraded event live information reports. In the community section, we optimized the integration of game information and strategies for various games and added an e sports encyclopedia tab with comprehensive data on events, teams and players. All of these enhancements are designed to better meet users' needs for professional game and e sports content. On a related note, several new features we mentioned on our last call, including AI powered customized commentary, real time game status information and intelligent editing for highlight replace also became available with this iteration. We remain dedicated to technology and product advancement leveraging Huya's strengths in game data and AI to bring users a unique, super interactive experience in terms of real time interaction, watching while playing and deliberate content creation.

Speaker 1

In turn, these differentiated experiences will deepen our competitive mode. In summary, we will continue to embrace changes in user demand and industry dynamics as the industry and market evolve. Through innovation across content, platform, ecology, technology, products and commercialization as well as deepened cooperation with industry partners and content creators, we aim to propel Huya's business growth As we fortify our leading position in the game live streaming market and expand our presence in the game value chain, we will also drive the future development of the live streaming and game industries. With that, I will now turn the call over to our acting Co CEO and VP of Finance, Azulie Wu to share more details on our results. Azului, please go ahead.

Speaker 2

Thank you, Vincent, and hello, everyone. I'll provide some updates on our operating metrics and financials. On the user side, we continue to solidify our user base despite the Q1 being the usual low season for live streaming activities. Upgrades to the HUYA Live APP and innovative cross platform Esports events and operational activities drove Huya Live's average mobile MAUs to 82,600,000 for the 1st quarter, up from 82,100,000 for the same period last year. Also, the expansion of our game related services and users paying for in game virtual items contributed to a slight sequential increase in paying users on HUYA Live, reaching 4,400,000.

Speaker 2

Moving on to our professional content initiatives. On the licensed content front, we broadcasted over 65 licensed professional Esports tournaments in the Q1 of 2024 with the spring speed of LPL, KPL and CFPL attracting the most viewers. Major Copenhagen Force Counter Strike 2 and Master Magic for Waterfront also emerged as it hits on our platform. During the quarter, our licensed tournaments spent over 20 titles and the broad coverage of these popular Esports games further enhanced our content competitiveness. In addition to licensed Esports content, we broadcasted 14 self organized Esports tournaments and entertainment PGC shows during the quarter.

Speaker 2

Many of these performed quite well, even though the Q1 is traditionally the off season for large events. In addition to the cross platform New Year's Esports All Star event that we just mentioned, Huya Champions Cup for crossfire mobile and the commentary program for major Copenhagen event also capture viewer attention. Furthermore, we hosted the 2nd stop of our village game series, the youth Quijiang Village Games for Honor of Kings in Quijiang, Zhejiang province. This event was a big success, advancing our efforts to expand the influence of esports content, while also promoting local culture and village revitalization. In terms of our financial performance, revenues from game related services, advertising and other businesses increased rapidly, partially offsetting a decline in live streaming revenues.

Speaker 2

The game related services, advertising and other segment accounted for 16% of our total revenues in Q1, up from 12% last quarter and 5% a year ago due to game related services increasing contribution. As game related services enjoy a higher gross margin, their increased contribution to total revenues also contributed to our gross margin improvement this quarter, driven gross margin to 14.7% in combination with our cost optimization efforts. As this segment's revenue continues to grow, we expect our overall gross margin to benefit further. We also reduced total operating expenses by 17.8% year over year with double digit savings in all three OpEx line items. We were pleased to achieve a meaningful profitability improvement in the Q1.

Speaker 2

Let's move on to our Q1 financial details. Our total net revenues were RMB1.5 billion for Q1 compared with RMB1.96 billion for the same period last year. Live streaming revenues were RMB1.26 billion for Q1 compared with RMB1.86 billion for the same period last year, primarily due to the continuous soft microeconomic and industry environment as well as our proactive business adjustments to support our strategic transformation and prudent operations. Game related services, advertising and other revenues were RMB244 1,000,000 for Q1 compared with RMB103 1,000,000 for the same period last year, primarily due to increased revenues from game distribution and advertising services and in game item sales. Cost of revenues decreased by 24% year over year to RMB1.28 billion for Q1, primarily due to decreased revenue sharing fees and content costs as well as bandwidth costs.

Speaker 2

Revenue sharing fees and content costs decreased by 25% year over year to RMB1.12 billion for Q1, primarily due to the decrease in revenue sharing fees associated with the decline in live streaming revenues as well as lower costs related to esports content. Fanfare costs decreased by 30 6% year over year to $60,000,000 for Q1. This was primarily due to improved bandwidth cost management, favorable pricing terms and continued technology enhancement efforts. Gross profit was RMB221,000,000 and gross margin was 14.7% for Q1. Excluding share based compensation expenses, non GAAP gross profit was RMB225 1,000,000 and non GAAP gross margin was 14.9% for Q1.

Speaker 2

Research and development expenses decreased by 12% year over year to RMB135 1,000,000 for Q1, primarily due to decreased share based compensation expenses. Sales and marketing expenses decreased by 26% year over year to RMB76 1,000,000 for Q1, primarily due to decreased marketing and promotion fees as well as personnel related expenses. General and administrative expenses decreased by 18% year over year to RMB60 1,000,000 for Q1, primarily due to decreased share based compensation expenses. Other income was RMB 12,000,000 for Q1 compared with RMB4 1,000,000 for the same period last year, primarily due to higher government subsidies. As a result, operating loss was RMB39 million for Q1 compared with RMB57 1,000,000 for the same period last year.

Speaker 2

Interest income was RMB117 million for Q1 compared with RMB96 million for the same period last year. Net income attributable to HUYA Inc. Was RMB71 1,000,000 for Q1 compared with RMB40 1,000,000 for the same period last year. Excluding the share based compensation expenses and amortization of intangible assets from business acquisition, net of income tax. Non GAAP net income attributable to HUYA Inc.

Speaker 2

Was RMB92 1,000,000 for Q1 compared with RMB85 1,000,000 for the same period last year. Non GAAP net margin was 6.1 percent for Q1. Diluted net income per ADS was RMB0.3 for Q1. Non GAAP diluted net income per ADS was RMB0.39 for Q1. As of March 31, 2024, the company had cash and cash equivalents, short term deposits, short term investment and long term deposits of RMB9.4 billion compared with RMB9.9 9,900,000,000 as of December 31, 2023.

Speaker 2

Finally, let me provide an update on our shareholder returns. Under our up to US100 million dollars share repurchase program that began in August 2023. We have repurchased 15,200,000 huya ADS with a total aggregate consideration of US48.5 million dollars as of the end of March 2024. We also announced a special cash dividend declaration totaling approximately $150,000,000 in March 2024. These initiatives are expected to return an aggregate value of nearly US200 million dollars to our shareholders.

Speaker 2

We will continue to focus on improving our financial and operational performance, while building long term shareholder value. With that, I would now like to open the call to your questions.

Operator

Thank you, Ashley, and hello, everyone. If you are dialing in by phone, please press 5 to ask a question and then press 6 to unmute yourself. If you are assessing the call from the Tencent Meeting or both meeting applications, please click the raise hand button at the bottom left. For the benefit of all participants on today's call,

Speaker 2

Thanks management for taking my question. My question has been regarding the game related business. Can you give us some updates here? And we also noticed a new game to launch such as the D and F mobile and will this bring more opportunity to us? Thank you.

Speaker 2

Okay.

Speaker 3

We started our strategic transformation last August, focusing on commercialization upgrading and providing more game related services. At present, we have made positive progress in the commercialization of game related services. Through the rapid growth of revenue from game distribution and advertising services and in game item sales, the revenue of our game related services, advertising and other segments in Q1 reached 244,000,000, up by 137.6% year on year and 30.7 percent quarter over quarter. This growth not only reflects the high quality gamer user base on Huya platform, but also validates the development potential of our new business direction. Specifically, in terms of game distribution, we are constantly expanding the coverage of games to include more new and existing titles.

Speaker 3

This year, we have covered the distribution of popular games, including Honor of King, Battle of Golden Spectula and performed very well. For the new games we participated in before, such as Demiguance and Semi Devils 2 Mobile and Dream Star, Huya distribution channels have also achieved leading results, especially by ARPU of users in the game, which proves that the gamer users on Huya platform have high commercial potential. In this regard, we are constantly optimizing our operations in order to make better use of this advantage. In terms of sales of game props, we provide a variety of popular props for more games, which have covered dozens of games at present. At the same time, we are also cooperating with the companies to customize props for broadcasters, which helps to strengthen the relationship between the broadcasters and fans.

Speaker 3

For example, one of our previous broadcasters achieved a transaction value of more than 10,000,000 yuan when selling personal customized game skins in just one streaming session, reflecting the potential of this business model. In terms of advertising services, we are cooperating with more different game companies and carrying out innovative broadcast promotion activities to seize the opportunity of new games and mini games promotion in the market. At present, the game license permits are released normally, with more new titles appear in the market. This not only can bring more rich, live game content, but also bring more opportunities for us to develop game related services. For example, we are now actively preparing for the upcoming DNF mobile, working closely with the game studio.

Speaker 3

We are also recruiting for live streaming and doing promotion work for the launch of exclusive props and gifts. We have also set up a special pre download area in the game center section of Huya Live. Based on the long term large scale audience of D and S content in Huya platform, we hope that D and F's mobile games would also be popular on our platform and help the growth of game related services revenue. Finally, in addition, I want to point out that we typically recognize revenues from game distribution and in game item sales after revenue sharing with the game companies on a net basis. So that means game related services' actual total transaction value is much higher than its revenue and growing more rapidly.

Speaker 3

Game related services' strong and rapid growth in this quarter reinforces our confidence that this business revenue will continue to scale up. Also, as game related services tend to offer higher gross margins, This business should accelerate the improvements in our overall gross margin and profitability as its contribution to total revenues increases. In the long term, this transformation will not only enhance our revenue mix, but also enhance our revenue scale and profit levels.

Operator

Thank you. And our next question comes from Yiwen Zhang from China Renaissance. Yiwen, please go ahead.

Speaker 4

Thanks for taking my question. So this year, you had the 2nd year of our 2 year roadmap, they had earlier. And can you give us an update on 2024 revenue and profitability outlook? Thank you.

Speaker 3

In the Q1, our total revenue was RMB 1,500,000,000 and the rapid growth of revenue from game related services, advertising and others partially offset the decline in live broadcast revenue. Therefore, although Q1 is usually an off season for live broadcast business due to the influence of less large scale events and more holidays during the Spring Festival for broadcasters. Our total revenue only decreased by 1.7% compared with Q4 last year and the overall revenue tends to be quite stable. In terms of revenue mix, game related services, advertising and others accounted for 16% of the total Q1, up from 12% in the previous quarter and 5% in the same period last year. On a profit, due to the high gross margin of game related services, advertising and other segments, the increase of their contribution to total revenue also pushed up gross margin in this quarter.

Speaker 3

With our continuous efforts in cost optimization, Q1's gross profit margin increased to 14.7% from 13.7% in the same period last year. We also reduced the total operating expenses by 17.8% year over year and all the 3 OpEx line items achieved double digit year on year decline. On the whole, the profit level in Q1 achieved an effective improvement of which GAAP net profit increased by about 79%. As for this year's revenue, we expect that in Q1, live revenue from a year over year point of view will continue to be affected by last year's strategic transformation of internal resources allocation and more prudent operation. However, compared with the Q1, the revenue level is expected to continue to be stable and more so in the following quarters.

Speaker 3

As for the GaN related services, Ebixin and others, we expect that the following quarters of the year will see a relatively fast growth, which will lead to a gradual recovery of our overall revenues from the previous quarter. As of just as mentioned just now, most of the revenue from game related services is recognized after revenue sharing with the game companies as the net revenue. So despite the rapid growth of our business scale, we recognized value not as that much. And at the same time, given the nature of the business, we think that it would lead to a higher level of gross profit margins. From a full year perspective, due to the changes in revenue mix brought about by the new business growth, the proportion of higher gross margin business and total revenue will gradually increase.

Speaker 3

We will continue to optimize our event content costs and broadcasters costs. So compared to 2023, we expect the gross profit margin for the year will continue to improve. Gross margin is also an indicator that we are now placing greater expenses and labor costs. Overall, we'll continue to maintain our expectation of a full year profitability in 2024 and profit growth over 2023.

Operator

Thank you. Our next question comes from Richard Sun from HSBC. Richard, please go ahead.

Speaker 5

Thank you management for taking my questions. I have a question about cash usage. We have RMB1.3 billion cash on hand and we're halfway through the buyback program. So any updated plans in terms of say the buyback program to extend it or even increase the quarter as well as any plans for annual dividend down the road?

Speaker 3

We announced a share repurchase program of up to $100,000,000 in mid August last year. And in the Q1 of this year, we repurchased nearly $20,000,000 worth of our stock. As of the end of March, we had repurchased a total of $48,500,000 and in March, we announced a special cash dividend totaling approximately $150,000,000 So in total, these initiatives have returned nearly $200,000,000 to Huya's

Speaker 2

shareholders.

Speaker 3

At the end of March 2024, the company held cash, cash equivalents and deposits totaling approximately $1,300,000,000 The change compared to the number at the end of last December is a result of share repurchase expenses and payments from operations. After the completion of the current cash dividend payment of $150,000,000 we expect to have over $1,100,000,000 in cash, cash equivalents and deposits. Shareholder returns are a key focus of the management and we will continue to carry out our shareholder return initiatives in a manner that aligns with the market conditions and the Company's operations in order to reward the shareholders for their support and to enhance the Company's efficient use of cash.

Operator

Thank you. Now we will take our last question today from Thomas Chong from Jefferies. Thomas, please go ahead. Thomas, please unmute yourself.

Speaker 6

Thanks management for taking my question. My question is about the light streaming industry trend. How should we think about the competitive landscape or the relationship among different live streaming platforms? And how should we think about these changes affect Huya users as well as the host? Thank you.

Speaker 3

From the industry's point of view, the overall environment has become more open and we believe that the platforms are no longer isolated or purely competitive to each other. The game live broadcasting industry has entered into a new paradigm of growth that features both cooperation and competition. In this new market environment, we also believe that it brings broader opportunities to platforms to complement one another and share content and resources, thus creating more win win possibilities. Therefore, Huya as the leader in this industry is also striving to break down platform barriers and meet multiple needs of the users and sees business growing opportunities. Strengthening cooperation and linkage with various platforms and products and upgrading the platform ecology is one of our important strategies this year.

Speaker 3

On the one hand, we are cooperating more with some live broadcasting platforms in professional content production, cross platform broadcasting and commercialization. The New Year's Esports All Star event hosted by Huya in February this year is the 1st all star events event for which we have broken down the industry barriers. It also marks a major breakthrough in content co creation in the live game industry. At present, we have a number of cross platform self made events and activities in preparation. In addition to the broadcasters and signed esports players on Huya platform, these events will also invite players from other platforms to participate in them, so as to achieve in-depth cooperation on multiple platforms.

Speaker 3

For example, the upcoming Huya LOL Legend Cup will bring together outstanding players from the whole network for competition. The players' selection and forming of teams have attracted widespread interest from League of Legends players and esports viewers on multiple platforms, and this response has been very enthusiastic, which demonstrates Huya's brand influence as well as its strength in tournament production and operation. In addition, we are also embracing the field of short video. Based on Huya's rich broadcaster's resource and broadcast operational experiences, we will introduce our video and live content into these platforms, helping the broadcasters in Huya to obtain more opportunities for commercialization. At the same time, with further strengthening our cooperation with Tencent Group, we are delivering high quality content to various product lines within the Tencent ecosystem, such as Tencent Video, QQ and multiple game products, so as to reach a larger user groups.

Speaker 3

In terms of the platform ecology, we hope to become a more open ecological hub and promote a revolution in the industry by strengthening cooperation with live broadcasters and video platforms and game companies. Under the new business model, our service recipients will not only be limited to users on Huya Live, but also to the larger user group on more platforms throughout the wider network, so that we can also participate in a larger market. For existing users on HUYA, they will get more exciting content, which is conducive to enhancing user loyalty and activity. In addition, we are taking advantage of Huya's technology and product advantages in live games and create a differentiated user interaction experience on Huya platform through game data capabilities and AI capabilities. Through our efforts in ecological upgrading, our broadcasters will also have the opportunity to expand their popularity and enjoy wider sources of revenue.

Speaker 3

Our more diversified cooperation with game companies and innovative game related services initiatives will also help the broadcasters to expand their revenue channels, so as to cement the relationship between Huya and broadcasters community and enhance the attraction of Huya platform to broadcasters.

Operator

Okay. Thank you. 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 PSNT Financial Communications. This concludes today's call, and we look forward to speaking to you again next quarter.

Operator

Thank you. Bye bye.

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