Q2 2023 HUYA Inc Earnings Call
Participants
Ashley Xin Wu; VP of Finance & Co-CEO; HUYA Inc.
Hanyu Liu; IR Director; HUYA Inc.
Junhong Huang; Senior VP & Co-CEO; HUYA Inc.
Songtao Lin; Chairman of the Board; HUYA Inc.
Unidentified Company Representative
Lei Zhang; VP in Equity Research & Research Analyst; BofA Securities, Research Division
Thomas Chong; Equity Analyst; Jefferies LLC, Research Division
Unidentified Analyst
Yiwen Zhang; Research Analyst; China Renaissance Securities (US) Inc., Research Division
Presentation
Operator
Hello, ladies and gentlemen. Thank you for standing by for the Second Quarter 2023 Earnings Conference Call for HUYA Inc.
(Operator Instructions)
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
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 Senior Vice President of Huya and Ms. Ashley Wu, Acting Co-CEO and 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 incurrent 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. We 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.
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Songtao Lin
Hello, everyone. Thank you for joining our conference call today. It's my pleasure to participate in an Earnings Call for the first time and to speak with all of you. We have celebrated its seventh anniversary last week. A remarkable milestone in this industry. This assumes my role as Huya's Chairman in May and have had a comprehensive review of the company's business strategies with the company's management and business operations team. As a leading game live streaming platform, Huya has served a large number of games, enthusiasts, content creators and the partners in the industry value chain since its inception.
Now the 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 completement Huya well as established user community and the content ecosystem to drive long-term sustainable business development. We share the risk strategy update with you earlier this month, and we would like to take the opportunity today to deleverage on our latest plans. Given Huya's proven track record in the game live streaming market and close collaboration with industry partners, we have our position to achieve this new goal as the company enters a new phase of development. I'm 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
Okay. Thank you, Mr. Lin, and hi, everyone. I'm glad to speak with you today. To expect 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 ship 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 live streaming 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 service and inside the active gamer user on Huya live are willing to spend both on game play and related in-game purchase.
Also, the proportion and amount of in-game spending by these gamer users tend to be higher than that of general gamer. Our rich game and export content offerings have already satisfied our gamer users' content consumption needs and we believe we can further capture the user group's commercial value by meeting their broader game-related needs with expansive 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 onetime even that functioned 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 misusers ongoing demand for in-game purchase of stems, weapons and other items, especially when users 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 publisher to promote their in-game products and expand our broadcaster income streams. We are currently discussing commensal 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 mall function which will be embedded into certain of our live channels yellow shopping car icon. Once game users buy their game accounts with their Huya account they can simply buy in-game items when watching live streaming content for using related games.
According to our plan, we will implement the function on small scales. Another priority is to expand income streams for our content creators and optimize our content cost structure. At present, our broadcasters income mainly consists of the sign-on fee we provide and their share 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 service, we will work to optimize our content creator 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 services. 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 reward while better aligning our content costs with our revenue. To affect 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 all function is already well underway. We also plan to upgrade interest tax 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 interest. 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 trends and help create more engaging interactive content and experiences.
In addition, we will further enhance our compliance capabilities by continuously investing in advanced technology, including an AI-powered content monitoring system to minimize operational risks and sustain a healthy community atmosphere on our platform. We are proactively restructuring several aspects of our business for more targeted allocation of internal resource to advanced our strategic transition towards a more balanced and sustainable development pathway.
To that end, we are planning to scale back certain less cost-effective live streaming features as well as financial incentives for live streaming 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 grew to approximately 30% of total net revenues within 3 years, creating a more balanced and diverse revenue mix to strengthen our foundation for long-term success. We are confident this transformation initiatives will empower our sustainable growth as we remain committed to serving the needs and interest 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 Xin Wu to share more details on our Second Quarter results. Ashley please go ahead.
Ashley Xin Wu
Thank you Junhong, 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's 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. This lies sequential improvement was mainly attributable to the increased e-sports content and entertainment programs we offer in the quarter.
With the new game launches also enriched the platforms gain content. Meanwhile, users and broadcasters time spend on off-line entertainment activities continue 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 license e-sport event, we broadcasted by 75 third-party professional e-sport 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 for fewer events than in the same period of last year, as we continue to implement stricter content procurement policies. Domestic professional lease from 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 broadcasted Valorant Masters Tokyo a tournament featuring professional teams from China and around the world. Given the timing of this major event just before the official China launch of Valorant in July, is attracting attention from our users and serve and engaging teaser for this new game on our platform.
Currently, Valorant is gradually cultivating its streamers and co-audience on HUYA as we expect to offer more related content, including self-organized tournaments at its domestic e-sports (inaudible) develop. We also broadcasted more than 30 self-organized e-sports tournaments and entertainment PGC shows in the Second Quarter, with a total viewership of approximately 100 million.
For such produced content, we aim to create a metric of high-quality in-house IPs. The new systems of our HUYA branded All Star Cup for Peacekeeper Elite and Thunder Cup for Honor of King 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 KPM competition.
During the CS:GO Blast Paris major event, we conducted our commentary program, [Husho] major, live from a studio in Paris, winning rate from the tournament audience and increasing our user community interaction with this event. In addition, we held the eighth season of Huya Kungfu Carnival during the quarter. Expanding these long-running programs 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 entertainment sports content.
In line with our new strategy, 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 maintain.
We further narrow 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. Live streaming 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 spend 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 of licensing revenues. If we exclude the impact of the recession in content licensing revenue as a result of our amended licensing agreement for LoL metric in January. The remaining portion of advertising and other revenues recorded single-digit growth year-over-year. Cost of revenue 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 live streaming revenues and normal 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 Q3 compared with RMB 50 million for the same period of 2022, primarily due to lower indirect tax reforms 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 investment 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 -- RMB 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, 2025.
Before we conclude, I'm pleased to announce that HUYA, 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.
Question and Answer Session
Operator
(Operator Instructions)
Your first question comes from the line of Thomas Chong from Jefferies.
Thomas Chong
(foreign language)
My first question is about our new strategies. Can management give us more details about the implementation. And secondly, talking about the target for our new strategies. Are there any short-, medium- and long-term target that we can share?
Unidentified Company Representative
(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 a game value trend and promotes the long-term sustainable development of the business and our main goals and plans include the following points.
(foreign language)
We shift the focus of commercialization towards 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 a significant gamer population. Although our users are willing and able to spend money on games, the 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 can not 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 increased revenue stream for broadcasters, which is beneficial to all the parties in the industry trend.
(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 improved the efficiency of the content cost we expand.
(foreign language)
At this stage, we are mainly engaged in the infrastructure building for 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 mall 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 investments.
(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 3 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.
Operator
Your next question comes from the line of Daniel Han from UBS.
Unidentified 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?
Unidentified Company Representative
(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 rate allocation. 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 its 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 copy rights 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 expect the overall profit situation will be improved and be maintained sustainably.
Operator
And the question will come from the line of Lei Zhang from Bank of America Securities.
Lei Zhang
(foreign language)
My first question is regarding the update on the recent regulatory environment and any impact to our business. Second delay how should we look at the performance of Tencent newly launched game Valorant in our platform.
Unidentified Company Representative
(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 miners 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 promote the benign and sustainable development.
(foreign language)
As a leader in our industry, GEA has recently taken the initiative to upgrade and optimize the content and functions of our platform and refine the operation 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 gels to strengthen their compliance awareness and pay attention to improving the compliance capability on the platform through technical investment.
(foreign language)
On the front of the new game, the live streaming 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 life and derivative content. HUYA provides launch incentives and traffic support for the launch of the new games and we'll also organize activities and provide some products together with the game companies and with weighted support according to the different game characteristics.
(foreign language)
For example, Valorant with (inaudible) have achieved a leading market share. And for this popular e-sports 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 the scam, including events attended by the broadcasters and professional players to further enhance the activity of this game sector.
Operator
Your next question comes from the line of Yiwen Zhang from China Renaissance.
Yiwen Zhang
(foreign language)
Thanks for taking my question. So with our commercialization focus shifting with our view on our content strategy is there any change we plan to make?
Unidentified Company Representative
(foreign language)
Our new strategic plan is deeply embedded in Huya's existing user groups and content ecology. The rich e-sports 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.
(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 events commentary with daily content and digging deep into the game content. We will also bring technical support of products such as fully 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 sports, 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 a 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
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
This concludes this conference call. You may now disconnect your lines. Thank you.
