HUYA Inc.

Good day and good evening, and thank you for standing by. Welcome to HUYA's Third Quarter 2023 Earnings Webinar. I am Henry 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.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, 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 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 on the applicable law. Please also know that WHOIA'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, I'm pleased to turn the call over to our Acting Co-CEO and SVP, Mr. Junhong Huang. Please go ahead.

Okay. Hello, everyone. Thank you for joining our earning conference today. The third quarter of 2023 was a transition period for Huya. Amid the soft industry environment and our proactive business adjustment, we achieved total net revenues of RMB 1.65 billion in the third quarter. We also reported positive net profit exceeding our expectations with non-GAAP net income reaching RMB 103 million in the quarter. As we continue to strengthen our user base, we are also beginning to make progress in our strategic transformation. As we discussed last quarter, our transformation targets are shifted in our commercialization focus, building on our deep experience and success of We Ask Game livestreaming business. We plan to provide more game-related services such as game distribution, in-game item sales, and game advertising. This will empower us to better capture our gamer users' commercial value by satisfying more of their game-related needs in addition to their content construction needs. Our main goal this year is to build the business infrastructure required to support these new services while developing terms of cooperation with game studios. Let me share some details of our third quarter efforts. First, to enhance our game distribution capabilities, we recently upgraded the Fuya Live App's existing game center, a one-stop shop where users can pre-order and download new games, obtain Fuya exclusive gift game toolkits, and view latest game information. We enriched the game center's game library and improved the product download function. while also encouraging our streamer to participate in game promotion activities. During the quarter, we participated in the distribution of Demigods and Semi-Devil to mobile and promoted the game on both our game center and broadcaster's channel pages. This early game distribution cooperation outcome was encouraging, with Huya's distribution channel achieving good image Initial results in terms of gross billings generated on the first day of the game's launch. While we continue to optimize our game distribution process and functions, we will also look to partner with more upcoming games for these services. As for the in-game item sales business, we have completed development of our in-game item more function and added it to our app. This more function not only offers users a convenient overview of GamePop products, but also allows us to prompt user check-ins and provide consumer rewards to maintain users' purchase thickness. So far, we have reached a compilation with eight game titles on in-game item sales, including Honor of Kings, Crossfire, Demigods, and Sammy Devils True Mobile. As the first step, a small number of skins and weapons from these games have been made available in the mall and in the yellow shopping cart on selected Broadcasters Live channels. Users can purchase them directly from the yellow shopping cart while watching this Broadcasters Live content. Going forward, we will further refine the entire purchasing experience from buying gamepops on Huya and building users' Huya accounts with their respective game accounts through claiming purchased virtual items within games. At the same time, we are exploring various operational activities around in-game item sales. For example, in September, one of Huya's broadcasters held a live event showcasing the first wearing of a newly designed skin item and described the skin's characteristics and effects in detail during gameplay. The session not only attracted fans' attention, but also gave players a unique opportunity to gain insight into the product before its official launch. Furthermore, in October, we collaborated with a game publisher to introduce a customized skin suit for a popular broadcaster of that game on our platform. The skin shoots limited time exclusive sale on that broadcaster's channel provide growth quite successful with sales exceeding expectations. As activities like this game traction, we will also develop and adopt operational strategy targeting different tiers of broadcasters, thus increasing broadcaster's willingness and ability to participate in game item sales services. On the advertising services side, we have thoroughly analyzed our ad slots and ad types and have begun adjusting our approach accordingly. For brand advertising, which accounts for the majority of our ads, we are deepening our collaboration with advertisers, especially on upcoming game promotions. For example, we worked with Game Studio to organize cross-platform campaigns involving our streamers to increase brand exposure for its new game. Meanwhile, we are increasing our emphasis on performance-based advertising, especially for the currently popular minigames and exploring other users to increase its effectiveness on our platform. Along with these new strategic initiatives, we believe that sustainable development of our platform's content ecosystem remains vital to VUYA's future growth and success. Game-related services will both complement and enhance our live streaming business as we realize the myriad of synergies emerging across content and operations. We are committed to solidifying Huya's core user community and maintaining a healthy broadcast ecology through high quality broadcaster generated content and professional esports content, while also leveraging new technologies such as AI generated content. Let me give you an update on our latest progress on the AI front. We are actively exploring the application of AIGC across the entire broadcaster content production chain to further improve content creation quality and efficiency as well as user engagement. For example, our recently developed AI assistant feature offers intelligent chat, fan interaction, game analysis and mini game widgets function as well as array of content creation tools. Powered by our tens of billions parameter large language model, chain on data from broadcasters streaming content on our platform, as well as natural language processing technologies, AI Assistant can imitate a broadcaster's style and tone while chatting with viewers during live session for an authentic and entertaining user experience. Furthermore, Broadcaster can create customized digital avatar using AI assistance, 2D and 3D digital human technologies and AIGC technologies to satisfy various scanner rails specific requirement. AI assistant is also equipped with image recognition and AI reasoning capabilities for viewing and evaluating game skins, empowering broadcasters to seamlessly provide real-time analysis of gameplay. In addition, our intelligent editing and generation tool help broadcaster quickly generate high-quality video highlights of their live broadcast content and esports tournament, greatly improve the professionalism and production efficiency to deliverative content. In summary, steady execution of Our strategy and transformation plan in this quarter lay a solid foundation for our future development. We are confident that as we strengthen our game live streaming content ecosystem and expand our presence in the game value chain, we will drive more balanced and sustainable business growth in the long term. With that, I will now turn the call over to our Acting Co-CEO and VP of Finance Ashley Wu to share more details on our third quarter results. Ashley, please go ahead.

Thank you, Vincent, and hello, everyone. I'll continue with some updates on our operating matches and financials. On the user front, although we continue to be affected to some extent by users and broadcasters time spent on offline entertainment activities. Our diversified esports tournaments and entertainment programming during the summer session boosted Hoya's live mobile MAUs to 86 million for the third quarter of 2023, up 3.7% from 82.9 million for the purest quarter and threat year-over-year. Meanwhile, we maintain our strict marketing and channel spending policies to keep our expenses down. In the first quarter, the Huya Live app's next month user retention rate remained above 70%, demonstrating high user stickiness. Let me elaborate on our professional content enrichment. For licensed esports events, we broadcasted about 80 third-party professional esports tournaments in the third quarter of 2023, with total viewership of approximately 480 million. The summer space of LPL, KPL, and LCK were the most watched tournaments of the quarter. The Counter-Strike 2 events EPL Season 18 and IEM column, which are exclusive to Huya in China, were also quite popular among our users. Overall, we will continue to focus on implementing strict procurement processes for licensed esports tournaments and strengthening operational activities to improve the ROIs of the events. For self-produced content, we continue to enhance our own IP metric and increase our IP's market influence. In the third quarter, we broadcasted about 30 self-organized esports tournaments and entertainment PGC shows with a cumulative viewership of more than 110 million. League of Legends Hero Cup Peacekeeper Elite All-Star Cup Summer and Honor of Kings Streamer League were our top performing self-produced events. We also hosted the Wuwei Cup All-Star Invitational for Valorant, raising the profile of this newly launched game on our platform. During the ChinaJoy Gaming Expo in Shanghai, we held a series of on-site competitions, for HOK, LOL, LOL Wild Rift, and Waterlands, involving our fans, professional players, and popular broadcasters, promoting the integration of live content and offline activities. I also want to highlight that Huya broadcasted the Asian Games 2023 held in Hangzhou from late September to early October. This year's event featured the debut of esports competitions as medal programs. Chinese esports teams performed well this year, which boosted public awareness of esports nationwide. The Asian Games esports events also attracted broad attention from our users, with our League of Legends and Honor of Kings events ranking among the top five of all our tournaments this quarter in terms of peak concurrent users. Notably, our Asian Games Esports broadcast showcase our advanced 4K HDR technology and our commitment to superior viewing experiences. We were the only broadcast platform to provide 4K HDR support across multiple devices, including Android and iOS app, website, and PC client, for both live streaming and on-demand video replay, which enable us to bring more delicate detail and richer color to the esports game series for our users. With our real-time super solution image quality technology that supports various devices. We were also able to improve video quality under weak network environments to better meet users' requirements for clarity and smoothness, optimizing their event viewing experience. In addition, we produced commentary programs tailored to the Asian Games esports events to provide new esports viewers with competition-related background information, enhancing their understanding of the events while introducing them to Huya's high-quality, engaging content. Turning now to our financials, our third quarter revenues continue to decline due to the challenging market environment. and our proactive business adjustments in support of our strategic transformation and prudent operations. Nevertheless, our gross margin remained resilient and reached 13.9% in Q3 as we continue to realize savings in content costs, particularly content licensing and broadcaster-related costs as well as bandwidth usage. Our total operating expenses in the third quarter decreased 20.7% year-over-year and 8.7% quarter-over-quarter, reflecting our ongoing operational optimization efforts across the organization. Let's move on to our Q3 financial details. Our total net revenues were RMB 1.65 billion for Q3, compared with RMB 2.38 billion for the same period last year. Livestreaming revenues were RMB 1.53 billion for Q3, compared with RMB 2.02 billion for the same period last year, primarily due to a decrease in the number of quarterly paying users on Huya Life to 4.2 million for Q3 from 5.5 million for the same period of 2022. The decline in the number of quarterly paying users was primarily attributable to the soft micro and industry environment and our proactive business adjustments. as well as the increase in offline entertainment activities, which affected the time spent by non-TEL users on our platform. Advertising and other revenues were RMB 116 million for Q3, compared with RMB 361 million for the same period last year. This was primarily due to a significant decrease in content sublicensing revenues. If we exclude the impact of the reduction in content sublicensing revenues as a result of our amended licensing agreement for LOL metrics in January, the remaining portion of advertising and other revenues recorded single-digit growth year-over-year. Cost of revenues decreased by 30% year-over-year to RMB 1.42 billion for Q3, primarily due to decreased revenue sharing fees and content costs, as well as standard costs. Revenue sharing fees and content costs decreased by 31% year-over-year to RMB 1.23 billion for Q3, 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 and content creators. Bandwidth costs decreased by 28% year-over-year to RMB $83 million for Q3. This was primarily due to improved bandwidth cost management, variable pricing terms, and continued technology enhancement efforts. Gross profit was RMB 228 million and gross margin was 13.9% for Q3. Excluding share-based compensation expenses, non-GAAP gross profit was RMB 231 million. and non-GAAP gross margin was 14% for Q3. Research and development expenses decreased by 17% year over year to RMB 142 million for Q3, primarily due to decreased personnel-related expenses and share-based compensation expenses. Sales and marketing expenses decreased by 24% year-over-year to RMB 95 million for Q3, primarily due to decreased marketing and promotional fees, as well as personnel-related expenses. General and administrative expenses decreased by 23% year-over-year to RMB 60 million for Q3, primarily due to decreased share-based compensation expenses. Other income was RMB 40 million for Q3, compared with RMB 44 million for the same period last year, primarily due to lower indirect tax refunds and government subsidy. As a result, operating loss was RMB $29 million for Q3 compared with operating income of RMB $12 million for the same period last year. Interest and short-term investments income was RMB $128 million for Q3 compared with RMB $72 million for the same period last year, primarily due to increased interest rates and improved management of deposit products. Net income attributable to Huya Inc. was RMB 12 million for Q3, compared with RMB 60 million for the same period last year. Excluding the share-based compensation expenses and impairment loss of investments, non-GAAP net income Attributable to Huya Inc. was RMB 103 million for Q3, compared with 106 million for the same period last year. Non-GAAP net income margin was 6.3% for Q3. Diluted net income per ADS was RMB 0.05 for Q3. Non-GAAP-dinoted net income per ADS was RMB 0.42 for Q3. As of September 30, 2023, the company had cash and cash equivalents, short-term deposits and long-term deposits of RMB 10.6 billion, compared with RMB 10.8 billion as of June Finally, let me provide an update on our share repurchase program. We announced our share repurchase program of up to USD 100 million over a 12-month period in mid-August 2023. Since then, we have repurchased a total of USD 9 million of shares as of the end of Q3. We will continue to execute our share repurchase program, reinforcing our commitment to enhancing shareholder value. With that, I would now like to open the call to your questions.