HUYA Inc. (HUYA) Q1 2018 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen. Thank you for standing by for the First Quarter 2018 Earnings Conference Call for Huya Incorporated. [Operator Instructions] Today's conference call is being recorded. I'll now turn the call over to the company. Please go ahead.

Hello, everyone, and welcome to the First Quarter of 2018 Earnings Conference Call for HUYA Inc. 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. David Xueling Li, Chairman of Huya and Founder, Chairman and Acting CEO of YY; Mr. Rongjie Dong, the Chief Executive Officer of Huya; and Henry Sha, the 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 U.S. Private Security Litigation Reform Act of 1995 (sic) [ 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 projected and other public filings that's 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 earning press release and business conference call includes 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 measure to the unaudited most directly comparable GAAP measures. I'll now turn the call over to our Chairman, Mr. David Li. Please go ahead.

Hello, everyone. Good morning and evening. Thank you for joining Huya's 2018 first quarter earning conference call, which is also our first earning call as a public company. We are excited and honored to be the first game live streaming company listed on the New York Stock Exchange. We sincerely appreciate the support of our shareholders, and we look forward to engaging with you as a public company. I am extremely pleased with Huya's growth since inception just 4 years ago. The tremendous opportunity we saw in the faster-growing gaming live streaming and e-sport market in China promoted Huya's spin-off from YY. And the Huya's team success reflect the effective execution of our differentiated strategy. I have great confidence in Rongjie, Henry and the rest of the leadership team. As leading game live streaming platform in China, we successfully received strategic investment from Tencent in March and completed our IPO in May, which further solidifies our leadership position, enhance our brand and facilitates continued growth. We are excited about our opportunity to drive shareholder value and looking forward to providing regular updates on our progress. Now I would like to pass the call over to our CEO, Rongjie, to go through the first quarter's result in more details.

Thank you, David, and hello, everyone. I'm Rongjie Dong. We delivered strong financial and operational results in the quarter. Total revenue grew 111.5% year-over-year, and we continue to leverage our operating efficiency and achieved positive operating margin of 3.3%, generating operating profit is an important milestone as our company grows and capitalize it on the significant opportunity presented by game live streaming in China. Our user base is continuing its growth trajectory, averaging monthly active users grew to 92.9 million in the first quarter, up 19.2% from the first quarter of 2017. Notably, average mobile MAUs grew 25% year-over-year, reaching 41.5 million. Our growth in mobile users reflects the strength of our mobile strategy and the broader trend our users transitioning to mobile devices from PCs. Also, we continued to maintain and grow our user engagement through improved content offerings. We broadcasted over 50 e-sport events, such as LTL and LTK tournaments in the first quarter that attracted approximately 260 million viewers. Our efforts to promote e-sports events continue to solidify our top positioning as a leader in this space. And our content driving strategy promotes a more loyal user base, a higher level of engagement to have a sense of community and a longer life cycle. With the best-in-cost content ecosystem, we expect our user metrics to continue to grow. And we look to the future. We see continued opportunity for significant growth. We remain focused on driving high-quality personalized content and attractive features, driving engagement with our users and diversifying our content genres. In addition, through our Series B financing in March, we have entered into a strategic partnership with Tencent. We believe Tencent will bring to Huya great resources, particularly in the game and e-sports areas. While it is early in our relationship and details are still being negotiated, we believe this agreement reinforces our industry-leading positioning and strengthens our competitiveness. We expect to leverage this partnership to benefit from access to Tencent's content resources, particularly in the game and e-sports area. At the same time, Tencent could benefit from the opportunity to collaborate with our large and active base of broadcasters and users. This is truly a win-win collaboration that paves the way for future growth. We are also investing in live streaming technology to improve user experience and ensure we stay on top of our users' viewing preferences. We continue to advance our P2P technology to lower bandwidth costs and drive operational efficiency. Likewise, we will continue to improve our AI-backed applications and provide more personalized and customized services to our users, further enhancing user engagement. Finally, we are looking to further diversify our monetization channels by promoting our advertising services. Advertising and other revenue made up 6% of our total revenue in this year's first quarter, up 195 basis points year-over-year, and we strengthened our engagement and cooperation with merchants and broadcasters to effectively develop our advertising business. In addition, through our strategic partnership with Tencent, we plan to explore other potential monetization channels. We are pleased to deliver a solid first quarter as a public company and are excited to get the year off to a strong start. We are confident to leverage our established leadership positioning in game live streaming and engaged user community to deliver strong results in the future. With that, I will now turn the call over to our CFO, Henry, to share the financial details from the quarter.

Thank you, Mr. Dong. Hello, everyone. This is Henry Dachuan. As mentioned, we're off to a strong start to the year as total revenue grew 111.5%. And we were able to leverage that growth to generate quarterly operating profit. Our results demonstrate our strength and successful execution of our strategy and solidify our leadership position in the industry. Our success allow us to explore more strategic partnerships. And our recent listing on the New York Stock Exchange has further strengthened our brand name and influence in the industry. We are encouraged by our first quarter results and are optimistic about our future growth opportunities. That said, for the first quarter of 2018, our financial results are as follows: total revenues from the first -- for the first quarter of 2018 increased by 111.5% to RMB 843.6 million from RMB 398.9 million in the same period of 2017. Live streaming revenues increased by 107.2% to RMB 792.8 million in the first quarter of 2018, from RMB 382.6 million in the same period of 2017, primarily due to the increased spending per paying user and the increase in the number of paying users on Huya platform. The increase in the number of paying user was primarily driven by increased social activities and diversification of content offerings on our platform and our continuous efforts in converting active users into paying users. Advertising and other revenues increased by 212.4% to RMB 50.8 million in the first quarter of 2018, from RMB 16.3 million in the same period of 2017. This significant increase reflected our continuous efforts to expand the advertising service business that was launched in October 2016. Cost of revenues increased by 86.2% to RMB 712.5 million from the -- for the first quarter 2018, from RMB 382.8 million for the first quarter of 2017, primarily driven by increases in revenue sharing fees and content costs as well as bandwidth costs. Within cost of revenues in the first quarter of 2018, revenue sharing fees and content costs increased by 111.4% to RMB 513.6 million from RMB 246 million (sic) RMB 243 million in the same period of 2017, primarily due to the increase in picking and endorsements of our platform and our continued investment in content, such as e-sports tournaments. Bandwidth costs increased by 52.1% to RMB 156.1 million in the first quarter of 2018, from RMB 102.7 million in the same period of 2017, primarily due to an increase in bandwidth usage as a result of increased traffic on our platform and live streaming video quality improvement, partially offset by our improved efficiency in bandwidth utilization and increased deployment of cloud computing technology. Gross profit increased by 712.1% to RMB 131 million for the first quarter of 2018 from RMB 16.1 million in the same period of 2017. Gross margin increased to 15.5% in the first quarter of 2018 from 4% in the same period of 2017, primarily due to enhanced monetization efforts and better economies of scale. Research and development expenses increased by 21.4% to RMB 51.5 million for the first quarter of 2018, from RMB 42.4 million for the first quarter 2017, mainly attributed to increase in the salaries and welfare of research and development personnel. Sales and marketing expenses increased by 17.3% to RMB 25.9 million for the first quarter of 2018, from RMB 15.2 million for the first quarter of 2017, mainly attributed to the increase of marketing and promotion expenses, due to enhanced efforts in promoting our brand name and cooperating with various marketing channels. General and administrative expenses increased by 251.2% to RMB 35.8 million for the first quarter 2018, from RMB 10.2 million for the same quarter of 2017, mainly due to the increase of share-based compensation expenses related to the share awards newly granted as well as salaries and welfare of management personnel. Operating income was RMB 28.2 million for the first quarter of 2018 compared with operating loss of RMB 42.2 million in the same period of 2017. Non-GAAP operating income, which includes share-based compensation -- which excludes share-based compensation expenses was RMB 52.5 million compared with operating loss of RMB 35.2 million in the same period of 2017. The net income attributable to Huya in the first quarter of 2018 was RMB 31.4 million compared with a net loss of RMB 41.7 million in the same period of 2017. The non-GAAP net income attributable to Huya in the first quarter of 2018, which excludes share-based compensation expenses and a fair value loss on derivative liabilities related to our preferred shares was RMB 67.6 million compared with a net loss of RMB 34.7 million in the same period of 2017. The diluted net loss per ordinary share was RMB 4.96 for the first quarter of 2018 compared with diluted net loss per ordinary share of RMB 0.42 for the same period in 2017. The non-GAAP diluted net income for ordinary shares was RMB 0.35 compared with non-GAAP diluted net loss per ordinary share of RMB 0.35. As of March 31, 2018, the company had cash, cash equivalents and short-term deposits of RMB 4,071.6 million compared with RMB 1,035.8 million as of March 31, 2017. The increase was primarily due to funds received from our Series B financing. Net cash provided by operating activities was RMB 182.4 million for the first quarter of 2018 compared with net cash used in operating activities of RMB 138.3 million in the same period in 2017. In May, Huya successfully completed its IPO of 17.25 million American depository shares, including 2.25 million ADSs that underwriters exercised their over-allotment options in full. Total net proceeds we received from the IPO were approximately USD 189 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the company. Here is the business outlook for next quarter. For the second quarter of 2018, Huya currently expect total revenue to be between RMB 970 million and RMB 1,000 million, representing a year-over-year growth of 110.2% and 116.7%. In addition, the company expects to book a net loss attributable to HUYA Inc. due to fair value loss on derivatives liabilities related to Huya's initial public offering of approximately RMB 2.3 billion. This forecast reflects our current and primary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks. And we will now open the call to questions. Operator, please go ahead.

[Operator Instructions] Today's first question comes from Thomas Chong with Crédit Suisse.

[Foreign Language] My first question is about the 2018 e-sport strategy? And my second question is about the competitive landscape for the game broadcasting sector over the next couple of years? And thirdly is about any qualitative color about breakdown between game and entertainment revenue in Q1?

Okay. Thomas, thanks for your questions. So for the first question about our e-sport strategy for the year, I think the company will continue investing in e-sport tournaments and e-sport content. The top-tier e-sport tournaments include the LTL and PUBG, we believe that achieved huge viewership in the beginning of this year. So we see the trends that the game developer, publisher and streaming platforms will continue -- I mean, invest more capital and more resources, produce more e-sports content and to organize more e-sport tournaments online and offline. That clearly will improve the quality of the content. So -- and we believe that, in China, the e-sport industry will become a more mature in the near future. So for the second question about the competitive landscape, so we believe that the competition has been existing since years ago when game live streaming industry was still new to the real estate in China. So post the Huya's IPO, we saw there is a trend of concentration of content resources and the broadcasters and the viewers. That means the entry barriers for small players on this market will be higher. About your third question, we can now just provide the rough numbers about the revenue split. So -- our platform, the gaming counts, in general, more than half of the live streaming revenue. So that's our answers to your questions.

The next question comes from Wendy Chen with Goldman Sachs.

So I have 2 questions. First one is regarding our advertisement and other business revenue. And we mentioned that the advertising and others have increased 212% in the quarter. Just wondering how much was then coming from advertising and how much from other? For example, the self-developed game business and how we proceed as a self-developing game business going forward? And second question is, can you share more color on the cooperation with Tencent? For example, other than the game, do we see any game marketing revenue stream coming from Tencent and also any traffic, potentially traffic cooperation with Tencent's SNS platform like we had?

Sorry. We translated it to Rongjie. Wait a minute.

[Foreign Language]

[Foreign Language]

Yes, I'll translate that to English for the benefit of everyone else. Self-developed games is not a focus of the company, and the revenue is not significant.

I will take the -- your first question about advertising and other revenues, the split. I mean, the advertising, we believe that the business has achieved an even faster growth than we expected. So we believe that the whole year's result of advertising business will achieve the positive growth. It will be another major growth drivers of our total revenues. And your question about Tencent's cooperation?

[Foreign Language]

In relation to the cooperation with Tencent, I think what happened in Q1 is we received the strategic investment from Tencent, the most with the cooperation to add a discussion level for Q1. So you will be able to see more realized actual details from Q2 and Q3.

And to commentate to the answers to our CEO, so overall, we are exploring a variety of [ benefits ] of opportunities with Tencent, which has closed the [ service ] year our financial intents in March. So there was not a sufficient time of words to get into details and negotiation with Tencent. So we believe that Douyin particularly will be reaching our gaming and other streaming contents. And we plan to cooperate with Tencent to enhance our monetization capabilities and diversify our monetization channels, such as in the areas of advertising and in distribution. So -- also, by having Tencent as one other significant shareholder of the company, we believe that we can benefit from exclusive resources, such as e-sport tournaments and events, which will further expand our higher quality content offering and improve our monetization ability.

Our next question comes from [ Pash Mobali ] with Goldman Sachs.

Could you talk about any new game trends that you're observing, in particular, if you're seeing the emergence of PUBG take over? Or is it still the traditional games -- sorry, new games, such as Fortnite? Or is it still the traditional games, traditional in the sense that it's been PUBG and LoL, in particular, that have done very well on your platform? That's my first question. My second question is, your second quarter looks very good. Could you shed some light on what the drivers there are? Are you looking for continued acceleration in MAU? Is it the paying ratio? Or is it the per user spend -- per paying user spend that you're observing that is so encouraging into the second quarter? And if I might indulge, may I ask you what your current thinking, if possible is, if you could share that with us on the third and fourth quarter of this year?

Okay. Thanks. I'll help translate first.

[Foreign Language]

Thanks. To answer your first question, I'll help translate CEO's answer. So based on the current stats, obviously, we see a lot of new games popping out in the market. And -- but in terms of the current traffic in user preference, it's been popping not at the level of PUBG and LoL, as you mentioned, those names you dropped. But then from Huya's perspective, what we always want to do is to make sure we maintain our active broadcasters and maintain this engaged user base. So whenever these new games popping out, we can mobilize the broadcasters to broadcast the games and make sure the users are also attracted there.

To conclude -- comment to the answer, so we believe that potential success of the new games may bring a lot of new users to our platform in the future. To your second question about the next quarter's forecast, so we believe the revenue growth should be the result of the mix of growth of all the metrics, including growth of the user base and the growth of the paying user numbers as well as the improvement on ARPUs. So -- but we wanted to give the full year -- I mean the fourth quarter's forecast for now. That's our answers to your question, [ Pish ].

The next question today comes from Jerry Liu with UBS.

[Foreign Language] My first question is around the revenue growth acceleration for the second quarter on a year-over-year basis compared to the first quarter. Is this due to some of the newer games becoming more popular on the platform, including PUBG, which is still relatively new? Or is it because of some of the things that we have been able to do in terms of improving the monetization and maybe some other initiatives?

Thanks for your question. We will put the line on mute for the management to discuss and we will revert shortly.

So Jerry, the answers to your first question is about Q2 forecast, so we believe the acceleration of the revenue growth should be driven by our enhanced monetization capabilities, gaming related to live streaming contents on our platform. So as I mentioned on our last question, previous question, so it should be the mix of the growth of the MAUs and the growth of the paying users. Please go ahead.

Okay. Yes. So my second question is around competition. Two parts: one, investors recently have been quite concerned about just broader competition in the whole kind of video space, including maybe other short video and long-form video platforms. So just any way to speak about or even quantify whether you see any impact from the broader competition in social media? And then the second part is competition with your main competitor in game streaming, if there is any changes in the competitive dynamic because my understanding is that they also will like to build-out the talent agency system that you guys have, which is, we believe, a competitive advantage right now. Let me translate that. [Foreign Language]

[Foreign Language]

Thanks for Mr. Dong's response. I'll help translate the answers to the first question. So speaking of the short-form videos, if we look at the data from Douyin, Douyin actually achieved quite a strong growth in end of last year and also beginning of this year. Like, you can also see from Huya's perspective that our user has been -- our user base has been growing fast as well. So that just means the short-form videos and live streaming may turn to the front media for the users. Secondly is that, for the users for Douyin or Toutiao, they are more like wider entertainment user base. Whereas the user base for Huya, they are the core game users or core game enthusiasts. So that's why it's not easy. Naturally, it creates a barrier for other platforms to enter into live streaming. So it's not that easy for them to have huge or significant impact on Huya's growth. To answer your question in terms of our close competitor in the game live streaming platforms, especially how they are actually building the talent agency system, from Huya's own experience, we actually took about 4 years to actually have a quite healthy strong talent agency content ecosystem. So it's not -- yes, Rome is not built on 1 day. So it's not that easy for the -- for Douyin to actually achieve the same level of success in the short term. And we are actually happy to see that people in the industry, players in the industry, start to recognizing the value of talent agencies.

And Huya benefits from YY's experience in maintaining a healthier talent agency in the ecosystem. So we are still focusing on improving our monetization capabilities of the whole platform to increase streamers' personal income. So -- actually on this market, we've seen maybe like a trend, to enhance each platform to the ecosystem that run a content contribution. So -- but I need to mention that here on the call that we have still kept the highest numbers of the active broadcasters in the first quarter 2018. According to our prospectus disclosure, the average number of the monthly active broadcasters on Huya platform was 616,000 in the first quarter. That's our answers to your questions, Jerry.

The next question comes from Jinjin Qian with Needham.

Two, if I may. First is just to follow up. I know Huya is pretty differentiated on the game content. When you guys talk about diversifying into general entertainment -- other genres, how do you think about leveraging the current core users of your platform? And what specific type of entertainment, other content, will you guys be focused on? Second is, in terms of international expansion, could you give us an update on where things are? And maybe your go-to-market strategy and the business model for overseas? So I'll translate myself. [Foreign Language]

Thanks for your question. The management team will discuss and revert shortly.

[Foreign Language]

I will help translate the responses. Firstly to the second question in terms of our Southeast Asia strategy, we launched our app in May this year, so the beta -- the business is still at a early stage. But we would be able to tell -- share with you guys that we see a very strong demand from the users for game live streaming in the southeastern market, which has led to a huge potential for our future growth. Secondly, to the first question about other entertainment genres, it has been our focus to explore the nongame wider entertainment content. We have already had some nongaming entertainment live streaming on our platform in the anime and comic areas. And we will -- so that's a few areas that we would like to focus on in the near future.

Mr. Jin that's our answers to your questions.

The next question comes from Eileen Deng with Deutsche Bank.

[Foreign Language] My question is on the monetization inside the game streaming. In which kind of way that management plan to continuing to stimulate user spending inside the game streaming in the following quarters?

Thanks for your question. We will revert back shortly.

Eileen, we could give some inner pictures about the road map of how we can improve our monetization capabilities. So actually we believe that e-sports is a core focus of our users for now -- for our viewers for now. So in next several quarters, we will be like focusing on providing a more enriched e-sports and game live streaming content. There is a high certainty on the results of each like the e-sports matches and in tournaments. So that's the amazing -- the charming of this industry. So as we can see from the results of the previous quarters, e-sports in the gaming content achieved very successful monetization. So we are continuing to add more like social elements and to provide more enriched e-sport content to improve our -- the monetization capability and to drive the revenue growth. Any other questions from Deutsche?

No. [Foreign Language] My second question is also regarding the partnership with Tencent as Dachuan previously mentioned on the new monetization potential with -- inside the e-sports. Is there any foreseeable features and functions that we could except in this new monetization method? And also is the game platform of Tencent -- how is the platform going to affect our game streaming preparation on the streamers? Any color on this will be helpful.

Thanks for your question. The management team will revert back shortly.

Eileen, thanks for the question. So we believe that our strategy is to -- on game live streaming is that we are focusing on providing the most comprehensive gaming portfolio on the street. So we believe that no matter that how the developer and the publisher will provide it on their platform, we believe that we will grab all opportunities on this market, game live streaming on gaming content. To your questions about Tencent that we are in co-work with Tencent on several like directions, especially on e-sports content and resources. We believe that we achieved some like exclusive resource and content, such as the PUBG tournaments, such as the LTK tournaments. So we believe that we have the advantage as the preferred company of Tencent. So that are our answers to your questions.

Our next question comes from Hillman Chan with Citigroup.

[Foreign Language] So my first question is on the competition landscape. So with Tencent role as a common shareholders of Douyin and Huya, so how do we see the influence on them on the competitive landscape? And my second question is on -- also, the observation in the first half this year around improving operating metrics and profitability. So how do we see the longer-term net margin? And how do we go about getting there? And my last question is on e-sales and marketing strategy this year. What are the steps that we are doing to attract more users onto your platforms?

The management will discuss and revert.

[Foreign Language]

I'll help translate Mr. Dong's answers. Firstly, to your first question, Tencent's investment and how that's going to impact on the competitive landscape. Where we see, there has been a trend for consolidation, which will benefit the leading players and we will be able to extend our market shares. Secondly is on expanding relation, in particular, we would be able to explore different ways with Tencent to actually fewer, stronger growth in the game live streaming areas. But we believe the competition for the game live streaming players is not just about what the current market is. There is also potentials looking at the overseas market. There's potential looking at the nongame entertainment market. So based on the data and based on our growth trajectories, we are confident about the future market share and the competition in our favor.

[Foreign Language]

Thank you. Mr. Dong would like to add one more point, and I'll help translate. So it's kind of going back to all the questions that everyone has been asking on the call. The competition in going forward is not just about taking the top broadcasters, it's also your investment on the content ecosystem, and Huya has been really focused on this over the past few years and also will continue to focus on this area to build a strong, healthy content ecosystem. This will drive the future competitive advantage for Huya.

So I'll give you some very quick answers to your second and third questions. So about the margin trend, we believe that the growing revenue will improve our margin, but we believe that there will be some, like, fluctuations due to our continued investment in both content and technology. So about this marketing spending, for Huya, our philosophy is that we are trying to acquire users through the better -- higher-quality content. So our spending on this marketing will be not as large as the other like Internet companies in China. So that's our answers to your question.

At this time, this will conclude the question-and-answer session. I'd like to turn the call back over to the company for any closing remarks.

Thank you, everyone, once again for joining us. If you have any further questions, please feel free to contact Huya's Investor Relations over the content information provided on our website or the TPG group.

This concludes the conference call. You may now disconnect your line. Thank you very much for attending.