HUYA Inc. (NYSE:HUYA) Q4 2022 Earnings Call Transcript

HUYA Inc. (NYSE:HUYA) Q4 2022 Earnings Call Transcript March 21, 2023

Operator: Hello, ladies and gentlemen. Thank you for standing by for the Fourth Quarter and Fiscal Year 2022 Earnings Conference Call for HUYA Inc. . I’ll now turn the call over to Ms. Hanyu Liu, Company Investor Relations. Please go ahead.

Hanyu Liu: Hello, everyone, and welcome to HUYA’s Fourth Quarter and Fiscal Year 2022 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. Rongjie Dong, Chief Executive Officer of HUYA; and Ms. Ashley Wu, Vice President of Finance. 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 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 mostly 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. Amid ongoing macro headwinds, 2022 was a volatile year for us. While we delivered steady user growth for the year, our full year revenues came in at RMB9.2 billion, showing an annual decline and a net loss. Our focus has been on controlling the aspects of our business where we can make improvements to shore up our solid foundation and prepare for growth in a more favorable market environment ahead. In the meantime, we’ve honed our content and product offerings, as well as improved our operational efficiency, while fulfilling our commitment to corporate social responsibility. I would like to take the opportunity on this call today, to share with you some of our progress and strategy moving forward.

On the user side, we continued to bring high-quality e-sports tournaments and entertainment programs to our users. We also further enhanced the broadcaster and viewer interactive experience by partnering with game studios. As a result, we were able to achieve stable user scale and a healthy user engagement level in the fourth quarter. At the same time, we adopted stringent policies for our marketing spend to keep our expenses down, lowering Q4 sales and marketing expenses by 48% year-over-year. In the fourth quarter, Huya Live’s mobile MAUs reached 85.5 million, slightly up compared with the same period last year. On an annual basis, the mobile MAUs were 84.3 million, growing by 4% from 80.9 million in 2021. We also maintained our Huya Live app’s next month user retention rate above a 70% average for the full year.

Next, let me share with you some highlights on our recent product updates and the collaboration efforts with game companies. We have been expanding our portfolio of live streaming interactive features. In addition to the popular Gift Drops feature, we recently introduced an upgraded Treasure Digging feature. These additions further link broadcasters’ streaming behaviors with suitable audiences, and allow not only participating viewers to earn rewards, but also broadcasters to collect rewards for their activities. After a broadcaster completes a certain stream time or other streaming-related activities, Ores will be released for users to claim. Users can also obtain exclusive Ores by participating in the treasure digging live broadcast room, via check-ins and posting comments.

Ores can then be traded-in for a variety of game props provided by the relevant game company. This rewards system has been proven highly effective with our users. Last December, together with popular broadcasters on our platform, we launched Riot Games Carnival treasure digging activities for five major League of Legends IP games. The game studio offered 400, 000 pieces of free game tools and a cumulative 2.8 million users participated in the 20-day campaign, achieving a successful outcome from our innovative cooperation. Our collaboration is also a good representation of Huya’s continuous effort to provide more services around games and our ambition to diversify and increase our presence in the game industry value chain. In terms of our video business, our broadcasters continued to be the driving force of video content production, with more original creators joining our platform to enrich Huya’s supply of video content.

It is also worth mentioning that our AI real-time editing function is being utilized more often by our creators. This tool facilitates the re-creation of live content. Through automatic editing and processing capabilities, we can improve production efficiency and motivate both users and broadcasters. Our efforts to support our creators drove the total number of video uploads in 2022 up by nearly 50%, compared with the previous year. Meanwhile, we have been enhancing users’ video viewing experience and video content consumption. We did this through both embedded videos in our game community and by introducing an immersive vertical-video viewing format. With these enhancements, we achieved about 40% growth in total viewing time for on-demand videos on our mobile app in the fourth quarter, compared with the same period last year.

As we build out a more comprehensive video content ecosystem, we believe we can increase user stickiness and also drive communitization across our Huya platform. In terms of our corporate social responsibility initiatives, in 2022 we partnered with over 9,800 broadcasters and held more than 8,000 live streaming sessions promoting positive social impact. Topics covered areas such as traditional culture preservation, environmental protection and purifying the online environment from negative influences. During the year, we also joined forces with a few international NGOs to launch the “Protect Our Home Planet” campaign. These included a series of related public awareness activities featuring high-profile KOLs and our leading broadcasters. Additionally, we promoted the campaign by using a new virtual gallery digital format.

Millions of tournament viewers also enjoyed this new format, which was integrated into our tailor-made virtual e-sports venue for the 2022 Season of LoL World Championship final in Q4. These efforts have not only enhanced Huya’s brand influence but also contributed to the healthy development of the live streaming industry. While we achieved healthy user scale expansion for the year, we were impacted by the relatively weak market environment in 2022, which constrained user spending power. Regulatory policies introduced during the year have also placed added pressure on the industry by instituting higher compliance requirements for both gaming and live streaming sectors. Accordingly, we made prudent adjustments to our products and operations, and will continue to strengthen our abilities to meet compliance regulations and ensure our sustainable development.

The steps we have taken in 2022 to optimize our operations, costs and expenses place us in a strong position to benefit once the market begins to recover. Although there are still some uncertainties in the market environment in the near term, we will continue to strengthen our services for users and content creators, and provide high-quality content in 2023 and going forward. We will also advance our product development capabilities and implement innovative technology to further consolidate Huya’s core competencies. In doing so, we can maximize our advantages and maintain our leading position in the game live streaming market in China. In the meantime, we will actively explore opportunities to diversify our revenue streams and broaden our business ecosystem.

With that overview, I will now turn the call over to our VP of Finance, Ashley Wu, to share more details on our operating metrics and financials. Ashley, please go ahead.

Ashley Wu: Thank you, Mr. Dong, and hello, everyone. Following Mr. Dong’s remarks, I’ll start with some updates on our content enrichment and diversification initiatives. In the fourth quarter of 2022, we broadcasted over 70 third-party professional e-sports tournaments, and the total viewership of those events reached approximately 360 million. The largest viewership during the quarter was for LoL Worlds 2022, Honor of Kings International Championship, Demacia Cup and CFS Grand Finals. While the time zone differences between China and the U.S. for Worlds 2022 had some impact on the live broadcast views, the overall viewing data of our core users remained stable. Wild Rift League Season 2 also gained a lot of traction. In particular, with our deepened cooperation with the LoL Wild Rift game on tournament viewing, we introduced interactive prediction features and a 4K-HDR viewing experience for those matches.

These innovative features also make it easier for users to switch between the in-game streaming channel and our platform. The licensed tournament content supply in Q4 was not as high as in previous quarters, mainly due to event seasonality and certain disruptions from the COVID-19 resurgence. As such, we added more self-produced programs during the period. In the fourth quarter, we broadcasted over 45 Huya-organized e-sports tournaments and entertainment PGC shows, generating total viewership of approximately 150 million. In addition to fan-favorites such as PeaceKeeper Elite All Star Annual Invitational and Thunder series of Honor of Kings, we held the Huya platform qualifier for the Demacia Cup, which gained great traction with our users.

The commentary programs hosted by well-known streamers and former professional players for both Worlds 2022 and HoK International Championship, also helped promote the popularity of those events. Additionally, during the quarter, we launched two seasons of the dating variety show Heartbeat 72 Hours, further enriching the pan-entertainment content on our platform. Under our strict screening process for content procurement and production, we had over 30% fewer total licensed and self-produced events and programs in 2022, compared with the previous year. Our total viewing data, however, remained steady. Although our Q4 tournament licensing costs were significantly higher due to Worlds 2022, which was a major contributor to our gross loss for the quarter, we will stay true to our focus of covering key events that are popular among users, while striving to achieve better ROIs. As we disclosed in January, we entered into an amended licensing agreement for a series of League of Legends matches.

We believe this will effectively lower our overall tournament licensing costs in 2023. In the fourth quarter, we also continued to optimize broadcaster-related costs and bandwidth usage. We became more efficient with our operating expenses in Q4, reducing our total operating expenses by 35% year-over-year and 10% quarter-over-quarter. Our savings were primarily driven by lower expenses associated with sales and marketing channels and personnel. In our overseas business, we further narrowed our operating loss, thanks to our strategy to concentrate on key markets and promote greater localization. We plan to continue strengthening our prudent cost and expense control strategy as we move forward. Next, moving on to our Q4 financial details. Our total net revenues were RMB2.1 billion for Q4, a decline from RMB2.81 billion for the same period last year.

Live streaming revenues were RMB1.98 billion for Q4, compared with RMB2.61 billion for the same period last year. The decrease was primarily due to lower average spending per paying user and a decreased number of paying users on Huya Live, as the challenging macro and regulatory environment adversely affected paying users’ sentiment. Advertising and other revenues were RMB127 million for Q4, compared with RMB196 million for the same period last year. This was primarily due to soft demand for advertising services resulting from the challenging macro environment, as well as lower content sub-licensing revenues. I also would like to point out that following our amended licensing agreement for League of Legends matches in January, we no longer own the sub-licensing rights for LPL matches during the 2023 to 2025 period.

Since the sub-licensing of the LPL matches was a primary contributor to our content sub-licensing revenues in 2022, we expect the content sub-licensing revenues to decline significantly in 2023. Cost of revenues decreased by 15% year-over-year to RMB2.39 billion for Q4, primarily due to decreased revenue sharing fees and content costs, as well as bandwidth costs. Revenue sharing fees and content costs decreased by 12% year-over-year to RMB2.17 billion for Q4, primarily due to the decrease in revenue sharing fees associated with the decline in live streaming revenues. This is partially offset by the increase in spending on e-sports content, which was mainly related to the higher content cost booked for LoL Worlds 2022 in Q4 2022. Bandwidth costs decreased by 46% year-over-year to RMB100 million for Q4.

This was primarily due to improved bandwidth cost management and continued technology enhancement efforts, as well as less bandwidth usage as a result of strategic adjustments in our overseas business to stay focused on key markets. Gross loss was RMB284 million for Q4, primarily due to lower revenues and increased content costs related to e-sports content, particularly Worlds 2022. Gross margin was negative 13.5% for Q4. Excluding share-based compensation expenses, non-GAAP gross loss was RMB278 million, and non-GAAP gross margin was negative 13.2% for Q4. Research and development expenses decreased by 13% year-over-year to RMB144 million for Q4, primarily due to decreased personnel-related expenses and share-based compensation expenses. Sales and marketing expenses decreased by 48% year-over-year to RMB113 million for Q4, primarily due to decreased marketing and promotion fees, as well as personnel-related expenses.

General and administrative expenses decreased by 13% year-over-year to RMB79 million for Q4, primarily due to decreased share-based compensation expenses. Other income was RMB44 million for Q4, compared with RMB56 million for the same period of 2021, primarily due to lower tax refunds and government subsidies. As a result, operating loss was RMB577 million for Q4, compared with RMB457 million for the same period of 2021. Interest and short-term investments income were RMB102 million for Q4, compared with RMB62 million for the same period of 2021, primarily due to increased interest rates. Net loss attributable to HUYA Inc. was RMB524 million for Q4, compared with RMB313 million for the same period of 2021. Non-GAAP net loss attributable to HUYA Inc.

was RMB440 million for Q4, compared with RMB242 million for the same period of 2021. Non-GAAP net loss margin was 20.9% for Q4. Diluted net loss per ADS was RMB2.16 for Q4. Non-GAAP diluted net loss per ADS was RMB1.81 for Q4. As of December 31, 2022, the Company had cash and cash equivalents, short-term deposits, short-term investments and long-term deposits of RMB10.7 billion, compared with RMB11 billion as of September 30, 2022. Moving on to our full year 2022 results. Total net revenues for 2022 decreased to RMB9.22 billion, from RMB11.35 billion for the prior year. Live streaming revenues were RMB8.2 billion for 2022, compared with RMB10.19 billion for the prior year. Advertising and other revenues were RMB1.02 billion for 2022, compared with RMB1.17 billion for the prior year.

Non-GAAP gross profit was RMB643 million, and non-GAAP gross margin was 7% for 2022. Non-GAAP net loss attributable to HUYA Inc. was RMB281 million and non-GAAP net loss margin was 3.1% for 2022. Non-GAAP diluted net loss per ADS was RMB1.17 for 2022. To be mindful of the length of our earnings call, for additional details on our full year 2022 financial results, I encourage listeners to refer to our earnings press release issued earlier today. With that, I would now like to open the call to your questions.

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Q&A Session

Operator: . Our first question comes from the line of Thomas Chong from Jefferies.

Thomas Chong: I have two questions. The first question is about the user trend for this year? And number two is about the approvals. How should we think about the new games getting approved and with my — user growth momentum?

Rongjie Dong: Thank you. In terms of overall user strategy this year compared with the expansion of MAU, we will pay more attention to the stickiness and participation of users on the platform. Through more immersive community-based and interactive product strategies, we will improve the users’ consumption on the platform content and also to improve the user retention and interaction rates, so as to increase the users’ payment on our platform. At the same time, we’ll continue to spend prudently on promotion and channels. In the first quarter of this year due to the fact that the economy would just open up and a number of broadcasters on the platform had decreased in the short-term due to the COVID infections and the Spring Festival in China, so some users has also swift to the off-line activities, the level of MAU at the beginning of this year was affected.

But of course, we believe that these impacts are relatively temporary and we have seen stabilizing signs recently. It is expected that the future user number will return to a more stable trend. With the normalization of the release of licenses of games, some major games have obtained licenses and have gone — have been launched or will be launched soon. So the live content of these games is if they are popular and with the launch of e-sports events of these games, we believe that it will be conducive to the growth of the users of live platform, and we will also have the opportunity to bring us more additional user growth. At the same time, we’ll make sufficient preparations for the launch of new games such as the recruitment of streamers or hosting events, cooperating with game studios to provide incentives for the launch of new games, provide traffic and other resources support for new games so as to seize the opportunities of new games in a timely manner.

Operator: Our next question comes from the line of Yiwen Zhang from China Renaissance.

Yiwen Zhang: My question is regarding live stream and strategy for this year. And specifically, we signed a management agreement on the — tournament back in January, what’s the impact of our financial operation?

Rongjie Dong: From the perspective of live broadcast content, we’ll continue to strengthen the advantages of the streamers and also to enhance the competitiveness of the platform by providing more services and revenue sources for them. At the same time, the application of more live interaction functions and virtual life forecast technologies will help us to enrich the live broadcast forms and make the content of usage the streamers more innovative and interesting for the users. In terms of e-sports events, we mentioned in the previous conference call that we’ll continue to strictly screen the investment opportunities in copyrighted and self-run events. And in the copyrighted championship, we will strive for better commercial terms with all the copyright owners.

And in the self-made content, we’ll focus more on forming high-quality HUYA competition brand and to consolidate IP metrics of self-made content, and we’ll continue to reduce the procurement and investment for some relatively poor performing event content. At present, we’ll continue to cover the LPL of the LoL, the KPL, the PEL of Peacekeeper Elite, the LL Mobile and the CrossFire professional league as our main event. We will also have some exclusive events such as Dota 2 or CS:GO series events of ESL and LCK events of the League of Legends. So if there are new game-related e-sports events on the market made available, we would also dynamically evaluate and introduce new events if that is possible.