HUYA Inc.

Good day and good evening, and thank you for standing by. Welcome to HUYA's first quarter 2024 earnings webinar. I am Hanyu 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 Iowa website in a few hours. Participants of management on today's call will be Mr. Junhong Huang, who is Acting Co-CEO and Senior Vice President, 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 on 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 most directly comparable GAAP measures. With that, I'm pleased to turn the call to our co-CEO and SVP, Mr. Huang. Please go ahead.

Okay. Thank you, Hanyu. Hello, everyone. Thank you for joining our earning conference today. We are pleased to deliver first quarter results featuring a healthy user base expansion, growth in game-related services, and a more stable overall revenue trend. We also improved our profitability with non-GAAP net income reaching approximately RMB 92 million. 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 RMB 244 million for the first quarter. representing growth of 137.6% year over year and 30.7% quarter over quarter. This growth reflects a strong and engaged base of high value gamer users on our platform and validates our new directions potential. In terms of game distributions, we are broadening our coverage to include more games both upcoming and existing titles. Our gamer users 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. 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 eagerly awaited 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 a net basis. That means game-related services' actual total transaction value is much higher than its revenue. Game Relative Services' strong and rapid growth this quarter reinforces our confidence that this business revenue will continue to scale. Also, as Game Relative 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 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. In the first quarter, we hosted the New Year's eSports All-Star event in cooperation with three 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. 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. As an industry leader and barrier-breaking pioneer, our goal is to become a central hub within a more open content ecosystem. We are currently working with several live streaming platforms on professional generated content production, broadcaster cross-platform streaming, and commercialization. We're also embracing the short-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 product lines 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 this, we believe we can better meet users' needs, increase the VR platform's influence, and create future opportunities. Strategically, we are building a third-tiered pyramid of esports tournaments and event content. At the top are licensed professional esports tournaments. 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 esports 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 help to broaden the audience for esports content. Actually, we'll provide more details on our Q1 content activities later. In terms of technology and product advancements, we upgraded the Huya Live Mobile application to version 12 in February. This release features enhanced eSports information community content and game-related service functions, as well as new interactive features on game live channels. For example, a new dedicated event of 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 esports encyclopedia tab with comprehensive data on events, teams, and players. All of these enhancements are designed to better meet users' needs for prevention professional game and esports 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 replays, 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, superior interactive experience in terms of real-time interaction. Watching while playing and deliberate content creation in turn leads 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, Ashley Wu, to share more details on our results. Ashley, please go ahead.

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 first quarter 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 82.6 million for the first quarter, up from 82.1 million 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 4.4 million. Moving on to our professional content initiatives. On the licensed content front, we broadcasted over 65 licensed professional esports tournaments in the first quarter of 2024, with the spring speed of LPL, KPL, and CFPL attracting the most viewers. Major Copenhagen for Counter-Strike 2 and Masters Magic for Valorant also emerged as it hit 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. Many of these performed quite well even though the first quarter 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, Oya Champions Cup for Crossfire Mobile and the commentary program for Major Copenhagen event also captured viewer attention. Furthermore, we hosted the second stop of our Village Game Series, the Youth Qijiang Village Games for Honor of Kings in Qijiang, 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. The game-related services, advertising and other segments 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 high 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 first quarter. Let's move on to our Q1 financial details. Our total net revenues were RMB 1.5 billion for Q1, compared with RMB 1.96 billion for the same period last year. Livestreaming revenues were RMB 1.26 billion for Q1, compared with RMB 1.86 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 RMB 244 million for Q1. compared with RMB 103 million 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 RMB 1.28 billion for Q1, primarily due to decreased revenue sharing fees and content costs, as well as bandwidth costs. Revenue sharing fees and content costs decreased by 25% year-over-year to RMB $1.12 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. Bandwidth costs decreased by 36% year-over-year to $60 million for Q1. This was primarily due to improved bandwidth cost management, bearable pricing terms, and continued technology enhancement efforts. Gross profit was RMB 221 million and gross margin was 14.7% for Q1. Excluding share-based compensation expenses, non-GAAP gross profit was RMB 225 million and non-GAAP gross margin was 14.9% for Q1. Research and development expenses decreased by 12% year-over-year to RMB $135 million for Q1, primarily due to decreased share-based compensation expenses. Sales and marketing expenses decreased by 26% year-over-year to RMB $76 million 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 RMB 60 million for Q1, primarily due to decreased share-based compensation expenses. Other income was RMB 12 million for Q1, compared with RMB 4 million for the same period last year. primarily due to higher government subsidies. As a result, operating loss was RMB 39 million for Q1, compared with RMB 57 million for the same period last year. Interest income was RMB 117 million for Q1, compared with RMB 96 million for the same period last year. Net income attributable to Huya Inc. was RMB 71 million for Q1, compared with RMB 40 million 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. was RMB 92 million for Q1, compared with RMB 85 million for the same period last year. Non-GAAP net margin was 6.1% for Q1. Diluted net income per ADS was RMB 0.3 for Q1, Non-GAAP-diluted net income per ADS was RMB 0.39 for Q1. As of March 31, 2024, the company had cash and cash equivalents, short-term deposits, short-term investments, and long-term deposits of RMB 9.4 billion, compared with RMB 9.9 billion. as of December 31, 2023. Finally, let me provide an update on our shareholder returns. Under our up to US$100 million share repurchase program that began in August 2023, we have repurchased 15.2 million Huya ADS with a total aggregate consideration of US$48.5 million as of the end of March 2024. We also announced a special cash dividend declaration totaling approximately US$150 million in March 2024. These initiatives are expected to return and aggregate value of nearly US$200 million to our shareholders. 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.