HUYA Inc.
Q1 2020 Earnings Call Transcript

Published: 21 May 2020

[Operator:]

Ladies and gentlemen, thank you for standing by for the 2020 First Quarter Earnings Conference Call for HUYA Inc. [Operator Instructions].I will now turn the call over to Ms. Dana Cheng, company Investor Relations. Please go ahead.

[Dana Cheng:]

Hello, everyone, and welcome to Huya's 2020 First Quarter Earnings Conference. The company's financial and operational results were issued earlier today and are posted online. You can also view the earnings press release by visiting the IR website at ir.huya.com. A replay of the call will be available on the IR website in a few hours. Participants on today's call will be Mr. Rongjie Dong, Chief Executive Officer of Huya; and Ms. Catherine Liu, Chief Financial Officer. Management will begin with prepared remarks, and the call will conclude with a Q&A session.Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Security Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company results may be materially different from the views expressed today. Further information regarding these and other risks and uncertainties is included in the company's prospectus and other public filings as filed with the U.S. SEC.The company does not assume any obligation to update any forward-looking statements, except as required under applicable laws. Please also note that we have 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:]

Hello, everyone. Thank you for joining our conference call today. Since the beginning of this year, COVID-19 has caused a lot of uncertainties worldwide. We remain hopeful and are dedicated to helping people stay connected and providing them with rich online entertainment content during this critical time. Despite the macro environment challenges brought on by the pandemic, Q1 was another solid quarter for us. We saw accelerated growth of mobile users in the first quarter, which further strengthened our leadership position and increased our market share. Average mobile MAUs of Huya Live grew a 39% year-over-year, reaching 74.7 million, exceeding our previous target and hitting an all-time high. We had over 13 million net additions to our mobile users from Q4. So that growth was mainly driven by the rich content on our platform and our comprehensive and self-reinforcing ecosystem as well as the lockdown period and the extended school holidays during the coronavirus outbreak.Due to the closure of off-line Internet cafes during the coronavirus outbreak, our nonmobile users were negatively impacted. However, our total users still continued to grow. Average MAUs of Huya Live in Q1 increased 22% year-over-year, reaching 151.3 million, representing over 1 million net additions from Q4. While our user community experienced faster expansion, we were still able to achieve a high level of user retention and engagement.The next month user retention rate for our Huya Live app remained over 78%, and the daily time spent by users on Huya Live app increased to over 107 million from 100 million in previous quarters. Driven mainly by the accelerated growth of mobile users, our Q1 revenues grew 48% year-over-year, reaching RMB2.4 billion.Our revenue growth was accompanied by margin improvement, again, demonstrating our solid execution capability. Here, I would like to share another important update with you. As we previously announced in April, Tencent exercised its option to acquire 16.5 million Class B ordinary shares of Huya or $252.6 million in cash from JOYY. The transaction made Tencent the largest shareholder of Huya, increasing its voting power in Huya to 50.1% on a fully diluted basis.Since the transaction took place, we have been strengthening our collaboration with Tencent working closely across areas such as games, e-sports and AI technology. For example, we are developing new features, products and services to help us tap into Tencent's massive user community. We are also cooperating with Tencent to better serve our users and broadcasters as well as Tencent users.In addition, Tencent and Huya will be jointly exploring new business models and business opportunities across the gaming and e-sports value chain. With Tencent's strong support and their massive user community, we believe we are well positioned to strengthen our leadership in China's game -- live gaming industry.We see this cooperation as a start our new journey for Huya, and we look forward to being an active participant in a dynamic and growing market as well as to ensure driving more our game live streaming within the ecosystem of Tencent.With that, I will now turn the call over to our CFO, Catherine, to share further insights on the operating metrics and the financial details. Catherine, please go ahead.

[Catherine Liu:]

Thank you, Mr. Dong, and hello, everyone. Following Mr. Dong's remarks, I would like to first elaborate on our content enrichment and diversification efforts, our key user growth pillars. Our major content creators are our broadcasters. In Q1, our broadcasters live streamed a total of 55 million hours of content on our platform, representing increases of 53% year-over-year and 21% quarter-over-quarter. The number of average monthly active broadcasters on our platform in Q1 also hit a record high of over 800,000.Other important content sources for us are third-party e-sports tournaments. Due to the coronavirus outbreak, some of these tournaments that were originally scheduled in Q1 were either postponed or canceled. As a result, in Q1, we only broadcasted 67 third-party e-sports tournaments. This is a decrease from the same period from last year, but the viewership of these tournaments remained flat year-over-year at approximately 380 million. In Q1, we broadcasted major tournaments such as LPL Spring Season, Honor of Kings Winter Champion Cup, and we exclusively broadcasted LoL Champions Korea and PC -- and PGL Summit. As a reminder, e-sports tournaments are typically leveraged to attract user traffic, but are not a major contributor to our direct live streaming revenue. Given that we have achieved a surge in mobile user traffic during the lockdown period, the negative impact of the coronavirus outbreak to e-sports tournaments are limited in terms of both users and revenues.During this challenging period, we continue to build long-term relationships with the third-party e-sports partners. For instance, we partnered with ESL to exclusively live stream ESL ONE

[Operator:]

[Operator Instructions]. Your first question comes from Thomas Chong with Jefferies.

[Thomas Chong:]

I have two questions. My first question is about our user or our traffic trend in April and May as coronavirus is over. And my second question is about updates on Tencent cooperations. Remember in the prepared remarks, we have highlighted in gaming and e-sports as well as on AI technology. Can management further comment when we can see the synergies to come out to the industry? And would there be any changes in the competitive landscape?

[Catherine Liu:]

Thank you, everyone. I will answer the first question, and Mr. Dong will answer the second question. I think after the pandemic in Q2, we still expect our users to continue to grow, especially in China, since the recovery of the pandemic, we expect our nonmobile PC users will actually accelerate our growth. And to the second question, I will transfer to Mr. Dong.

[Rongjie Dong:]

Okay. I will translate. Since Tencent became our controlling shareholder, the collaboration between the 2 parties has been strengthened in various ways. I'll talk from a macro respect first. Firstly, we will continue to improve user experience on our end. For example, in addition to the content for live streaming, we will explore to provide additional forms of content -- of gaming content to our users. And also, we will have to optimize their viewing experience to satisfy them to watch the live streaming while they can also play in games. Secondly as we will explore innovative business models with Tencent, especially on the e-sports cooperation content licensing side.We aim to work with them to find other innovative value-added services business model for the e-sports cooperation. And from a more detailed perspective, there are two aspects I will talk about, firstly, is on the data because we will work with Tencent on big data so that our service can be connected with Tencent. And for example, we can have the results of a broadcaster's gaming competition and share the results on a real-time basis with our viewers. And secondly, we will reach between the gaming and live streaming so that the viewers can see a combined process while they can play and watching the gaming live streaming content on our end, mostly a smooth switching process we'll be provided to them. That's it. We can move on to the next question.

[Operator:]

The next question comes from Lei Zhang with Bank of America Securities.

[Lei Zhang:]

The first question is about the paying user. We see a pretty good number, paying user number in the fourth quarter, can you share more color on the paying behavior of new user with existing users? And what's the trend you can share in the following quarters? And secondly, about the overseas development, especially under the global coronavirus impact, do you expect a faster development in the overseas business?

[Catherine Liu:]

Our paying user has a pretty good user growth. The growth is mainly due to our increase of mobile users. Our mobile users actually contributed over 80% of our paying users. So we expect, as our mobile users continue to grow, our paying users should also continue to grow. In terms of new users, I think the user behavior is similar to existing users, but ARPU would be a little bit lower than the existing paying users. So in the next several quarters, we will continue to cultivate the paying behavior of those new users. And in terms of the e-sports tournaments and gaming events, the impact on the paying users would be less because those activities and the tournaments are mainly attracting sort of active users, but not contributing too much to the paying user side.And in terms of overseas, we do see similar trends in overseas market as in China in February and March due to the social distancing activities. So we do expect in Q2 our overseas users will have accelerated growth. And -- but we are still monitoring sort of the trend of the coronavirus and how it will impact the whole world. Okay. I hope this answers your question. Next?

[Operator:]

The next question comes from Vincent Yu with Needham & Company.

[Vincent Yu:]

My first question is on the reentry launch to gaming companion app. So as a separate app, is there any information we can share on there, such as what the estimate ARPU for this business? My second question is on impact from schools as many of them require students to go to school in weekends and also shortening the summer vacation. What's our view on impact to our business, such as MAU?

[Catherine Liu:]

Thank you. So we recently launched our player companion product called the [Foreign Language]. So since this is a very new product, we just launched that last month, so we probably will share more of the detailed information with investors in Q3. And currently, we see those users sort of had a similar behavior as the users who were playing this type of -- who are using this type of product and features in our main app.In terms of the impact of schools, students going back to schools, we think that currently, our user retention rate is still kept up pretty well. Our user retention rate is over 70% and our user spending time is over 107 minutes. We think that we would still be able to retain most of the users that we attracted in Q1. And also as the recovery of the economy, and we think some of the PC users will also increase. So in general, we think our MAUs will continue to grow. But of course, I think in terms of the -- the mix of the users probably would be a little bit different, i.e., the mobile users probably will not be growing as fast as our number of users in Q2. But I think we expect that both will still be -- continue to grow. I hope this answers the question.

[Operator:]

The next question comes from Binnie Wong with HSBC.

[Binnie Wong:]

So my first question is actually on the competitive landscape. After Tencent becoming the controlling shareholder, I just want to follow up on whether any strategy for Huya, how is it different? And any of the key KPIs have been setting for us? And also, how do you think that the competitive landscape will have changed? Example, if you have other -- your other competitors like Douyu, Bilibili, there are also investment of Tencent. But of course, with your closer relationship with Tencent, how does that change in terms of the resources opportunities allocated to Huya in there? And then just a follow-up here is that because of the competitive landscape, if you looked at Bilibili also starting to recruit the talent agencies. How do you think that will further improve the competition and might affect your sharing ratio. I'll quickly translate myself here.

[Rongjie Dong:]

Okay. I will translate. Since Tencent became our controlling shareholder, the collaboration is getting towards a more deepened respect. And we think, maybe from the mid to long term, with Tencent getting on board with us and with the collaboration deepens, it might be disruptive or having some sort of impact to the competitive landscape in the future. And from our perspective and from the industry itself, the main direction of the industry of the competitive landscape is actually stable given that -- whether it's Bilibili or Kuaishou, it's not only this quarter that they entered into this game live streaming industry. They were actually here for several quarters already. But it is sure that they have brought some changes to the industry. The first one is on the broadcaster and talent agency side because currently, I think for broadcasters and talent agencies, they place more focus and more importance on the combination of content to include both game live streaming and game videos. So this will be one of the ongoing focus for Huya in the future. And we hope that the video content of Huya's platform will be prosperous with all the efforts we're putting in.And secondly, we think the business model for broadcaster himself -- themselves is getting more diversified and more dynamic because in the old times, the income structure of broadcasters is only a sign-on bonus and the virtual gift revenue sharing. But for now, apart from those 2 income sources, they are also enjoying revenues coming from advertising and live streaming e-commerce. So I think with those newcomers getting into this industry, the income structure of broadcasters will be continued to be optimized in the future.And thirdly, regarding your question, whether Bilibili's revenue sharing incentive to the talent agency is going to impact us. I think we have seen that Bilibili is providing policies, greater revenue sharing to the talent agencies. And the degree of the adjustment is actually private, but I think for Huya, our gamers are -- has been in the industry so long and the [Foreign Language], it has been playing the talent agency model in the very beginning. So it's actually one of Huya's competitive advantage to have started the talent agency model quite early. So we think for the talent agency's network is actually healthier and more optimized on Huya's platform. So competitors' adjustments to their revenue sharing isn't going to change what we are sharing with the talent agency now because we have been maintaining a very good relationship within the network as we also provide a larger absolute amount in terms of revenue sharing despite the ratio change. Let's move on.

[Operator:]

Your next question comes from Wendy Chen with Goldman Sachs.

[Wendy Chen:]

I have two questions. One is about the diversification of monetization. We have seen peer platform launching other sort of monetization methods such as e-commerce live streaming, cloud gaming, short-form videos, et cetera. So wondering how do management see the future monetization pattern for game live streaming platform, whether the non-gaming portion will further extend? And my second question is about the mobile user addition. We have seen a quite notable mobile user growth this quarter. So can management share some color on those incremental users as in, let's say, which cities they come from, their age group as well as the content category they tend to consume?

[Catherine Liu:]

In terms of the revenue diversification, we do see and expect that the revenue diversification will continue. Currently, we are also exploring new opportunities -- a lot of new opportunities and business model. I think in the next couple of months, we also probably will launch our live streaming e-commerce business, but we will be only server as a platform for broadcasters to sell merchandises. So we are going to be on the light model instead of a pretty heavy model involves supply chain. So we do see there will be more revenue types and also the revenue diversification will continue.And for the new users that we attract in Q1, I think the characteristics are similar to the existing users in terms of age and areas. Probably slightly more of the new users are coming from the lower-tier cities. But in terms of the content that they're watching are similar to the existing users. Most of them are still watching the game content. And some of them are also watching non-gaming content. I hope this answers your question.

[Operator:]

The next question comes from Alex Lu with China Renaissance.

[Alex Lu:]

I'll translate myself. Can the management comment a little bit on the current cash allocation strategy? And also any area for further reinvestment?

[Catherine Liu:]

Currently, we still plan to use our cash for sort of our internal investment in terms of products and content and also as well as potential investments or acquisitions. In terms of investments, I think there are a couple of areas that we would like to particularly focus on in terms of internal investment. Such as, I think, one is content, we will continue to invest in content, including broadcasters and e-sports. And also this year, we will try to -- we will continue to keep investing and increasing our investment in self-generated content. And also, we will invest in some of our new products that we plan -- that we have already recently launched or plan to launch, including the gaming companion and short-form video and cloud gaming, stuff like that. In terms of the potential investments and acquisitions outside, we will try to find good opportunities that's along our sort of value chain around game live streaming and other games and the live streaming, et cetera, to see if the good opportunity arises, we will do investments or acquisitions. Hope this answers your question. Next?

[Operator:]

Your next question comes from Daniel Chen with JPMorgan.

[Daniel Chen:]

I will briefly translate. My first question is on the game cost resource. We have some very promising titles such as D&F mobile, League of Legend mobile in the second half. But we also see more and more platforms doing game streaming such as Google Music. So do we think that you would take more resource for us to acquire new hosts for these top games in the second half?Secondly, can we have some update on the advertising business as e-sports is becoming an increasingly popular genre. Are we seeing more and more brand advertisers trying to allocate resources to game live streaming and Huya? And what's our future strategy on advertising overall?

[Rongjie Dong:]

I will translate. For your question regarding broadcaster acquisition on the new games, there are two? We expect to talk about. The first 1 is that I would like to say the most important thing for the game live streaming competition to acquire the broadcasters is mainly focused on the existing broadcasters. Since we have been in the industry for a while and have maintained a quite competitive advantage in the gaming broadcaster pool, we think it actually set us in a very strengthened place in terms of keeping up the gaming broadcaster pool. And secondly is regarding the new broadcasters because for the new games coming into the market, we think it is important for the platform to cultivate the broadcasters. For Huya itself, we have a mature mechanism to treat and to cultivate the professional skills of the broadcasters. And we also have a good incentive mechanism to the mid-tier broadcasters. So we think for the new game broadcaster acquisition, we are quite ahead of the industry.Okay. To your next question, regarding to the advertising, we do see a lot of the sort of non-gaming advertisers start to advertise on our platform. So actually, our -- I think, in terms of number of the advertisers, our non-gaming advertisers actually are probably approximately 40% on our platform right now. However in Q1, due to the pandemic, actually, the -- a lot of the gaming advertisers spent more advertising dollars on our platform, and the non-gaming sector advertisers spent less. But we think that as the -- along with the recovery of the economy, we think the non-gaming advertisers will continue to increase their spending, and we will continue to diversify our advertising. And in terms of advertising forms, we are also trying to explore new opportunities in terms of different advertising forms. For example, I think e-commerce is also sort of like a new type of advertising form for us and for the broadcasters.

[Operator:]

Your next question comes from Tian Hou with T.H. Capital.

[Tian Hou:]

In the P&L statement, I saw Q1 gross margin and operating margin both improved on a year-on-year basis. So what is the company's outlook regarding the full year gross margin and profit margin? The second one is, last quarter management mentioned overseas expansion such as NIMO TV. So can management give us some update on that front?

[Catherine Liu:]

In terms of the margin expansion, I think this year, we -- as we grow our revenue, we would still like to maintain or grow our margins in the next couple of quarters. And in terms of the overseas development, in terms of our overseas MAUs in Q1, we have already reached about 24 million. And in Q2, we still expect a continued growth for our MAUs as the sort of the social distancing in overseas markets. So in overseas, we also, this year, we're also trying to explore new business models such as like subscription and advertising as well. So I hope this answers your question.

[Operator:]

We have come to the end of our question-and-answer session. I will now hand back to the company for closing remarks.

[Dana Cheng:]

Thank you all for joining today's conference call. If you have further questions, please feel free to contact [e-mail]. We look forward to speaking with you in our next quarter. Thank you.

[Operator:]

This concludes the conference call. You may now disconnect your lines. Thank you.