HUYA Inc
NYSE:HUYA
Earnings Call Analysis
Q3-2023 Analysis
HUYA Inc
The company's third-quarter results illuminate the challenges within the current market and operational landscape. Revenue dipped to RMB 1.65 billion from RMB 2.38 billion year-over-year, largely due to a drop in both live streaming revenues and in the number of paying users, which fell from 5.5 million to 4.2 million. This decline is attributed to macroeconomic factors, strategic business adjustments, and shifts in user behavior as offline entertainment gains traction. Advertising and other revenues also decreased significantly due to reduced content licensing income, but excluding this impact, these revenues saw single-digit growth. While revenues receded, the firm managed to cut costs effectively, reducing operating expenses by over 20% year-over-year and bringing gross margin to 13.9%.
Huya is in the midst of a strategic transformation intended to optimize resources and comply with regulatory standards. These adjustments have influenced a downturn in its live streaming revenue, but the impact in Q3 was less severe than anticipated. Looking forward, the company anticipates further disruptions in Q4 due to these adjustments. However, there is a silver lining with the onset of new game-related service businesses which, although contributing minimally to income this year, are expected to expand and increase their revenue share significantly by next year. Management's goal is to balance the income structure by 2025, aiming for game-related services to constitute around 30% of total revenue.
Huya actively capitalizes on major e-sports events to engage audiences and foster platform loyalty. With the broadcasting of the Hangzhou Asian Games and the League of Legends World Championship, Huya provided enhanced viewer experiences through high-quality streaming and interactive features. While these events boosted user attention and helped attract new users, the short duration of the Asian Games limited its overall impact on the quarterly MAU. The full effect of the League of Legends event's viewership will be assessed post- event closure.
Amidst macroeconomic uncertainty and a competitive landscape, Huya opts for prudence in cash management, balancing strategic investments and shareholder returns. The company announced a share buyback plan of up to $100 million to be executed over 12 months, signaling management confidence in the firm's trajectory. By September 30, $9 million worth of shares had been repurchased. Huya continues to explore investments and M&A opportunities while also considering various forms of rewarding shareholders, emphasizing a commitment to enhancing value and efficiency of capital.
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[Audio Gap] prepared remarks, and the call will conclude with the 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 these 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 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 over to our Acting Co-CEO and SVP, Mr. Junhong Huang. Please go ahead.
Okay. Hello, everyone. Thank you for joining our earnings 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 shift in our commercialization focus, building on our deep experience and success of Huya's game live streaming 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 game users commercial value by satisfying more of their game relative needs in addition to their content construction needs. Our main goal this year is to build a 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 Huya live app's existing game center a one-stop shop where users can preorder and download new games obtain Huya exclusive gift, game too keys and latest game information. We enriched the game centers, game library and improve the product download function while also encouraging our consumers to participate in game promotion activities.
During the quarter, we participated in the distribution of [ demigod ] and semi vivo to mobile and promoted the game on both our game center and broadcasters channel pages. This early game distribution corporations outcome was encouraging with Huya's distribution channel achieving good initial results in terms of gross billings generated on the first day of the games 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 malfunction and added to our app. This malfunction not only offers users to convenient overview of game pop products, but also allowed us to prompt user check-ins and provide consumer rewards to maintain users purchase stickiness.
So far, we have reached comparison with 8 game titles on in-game item sales, including Honor of Kings, CrossFire and demos and semi dives to mobile as the first step, a small number of skin weapons from these games have been 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 these broadcasters live content. Going forward, we will further refine the entire purchasing experience from buying game pops on Huya and building users Huya account with their respective game accounts through planning 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 a broadcaster held a live even showcasing the first wearing of a newly designed skin item and described the skin's characteristics and fact in detail during game play. The system not only attracted fans attention, but also gave players a unique opportunity to gain insight into product before its official launch.
Furthermore, in October, we collaborated with a game publisher to introduce a customized skin suite for a proper broadcaster of their game on our platform. The skin sheet limited time exclusive sales on the broadcasters' chain of provide grow quite successful with sales exceeding expectations. As activities like this game chain, we will also develop and adopt operational strategy targeting different tiers of broadcasters thus increasing broadcaster willingness and ability to participate in game item sales services.
On the advertising services side, we have thoroughly analyzed our app [indiscernible] and have been -- begun adjusting our approach accordingly for brand advertising, which accounts for the majority of our S, we are deepening our collaboration with advertisers, especially on upcoming game promotions. For example, we work 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 mini games and exploring other user to increase its effectiveness on our platform.
Along with these new strategic initiatives, we believe that sustainable development of our platform's content ecosystem remain vital to Huya'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 user community and maintaining a healthy broadcast ecology through high-quality broadcaster generated content and professional e-sports 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 band into exit game analysis and mini game widget function as well as array of content creation tools. Powered by our tens of billions parameter large language model change on data from broadcasters streaming content on our platform as well as nature language processing technologies, AI assistant can imitate a broadcaster style and tong 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 skin specific requirement. AI assistant is also equipped with image recognition and AI listening capabilities for viewing and evaluating game skins empowering broadcasters to simply provide real-time analysis of game play.
In addition, we -- our intelligent editing and generation tool help broadcaster quickly generate high-quality video highlights of their live broadcast content and e-sports tournament greatly improved professionalism and production efficiency to the deliberative 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 has strengthened 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 metrics and financials. On the user front, although we continue to be affected to some extent by users and broadcasters time spend on off-line entertainment activities, our diversified e-sports tournaments and entertainment programming during the summer session, boosted Huya's live mobile MAUs to 86 million for the third quarter of 2023, up 3.7% from 82.9 million for the previous quarter and flat year-over-year.
Meanwhile, we maintain our strict marketing and channel spending policies to keep our expenses down. In the third quarter, the Huya live next month's user retention rate remained above 70%, demonstrating high user stickiness.
Let me elaborate on our professional content enrichment. For licensed e-sports events, we broadcasted about 80 third-party professional e-sports channels, in the third quarter of 2023, with total dealership of approximately 480 million. The summer space of LPL, KPL were the most watched tournaments of the quarter.
The Counter-Strike 2 events ETL Season 18 and IEM columns, which are exclusive to Huya in China. We're also quite popular among our users. Overall, we will continue to focus on implementing strict procurement processes for licensed e-sports tournaments and strengthening operational activities to improve the ROIs of the events or 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 sales organized e-sports tournaments and entertainment PGC shows. With a cumulative viewership of more than 110 million. The colleges Hero Cup, these people lease all startup summer and Honor of Kings, Streamer League were our top-performing self-produced events. We also hosted the [indiscernible], raising the profile of this newly launched game on our platform. During the China gaming Expo in Shanghai, we held a series of on-site competitions for HOK, LOL, LOLs and watered, in moving our fans professional players and popular broadcasters, promoting the integration of live content and off-line 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 feature the deep of e-sports competition as material programs. Chinese e-sports teams performed well this year, which will take public awareness of e-sports nationwide. The Asian Games e-sports events also attracted broad attention from our users, with our League of Legends and Honor of Kings event ranking among the top 5 of all our tournaments this quarter in terms of concurrent users.
Notably, our Asian games e-sports 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 e-sports game here for our users.
With our real-time super solution image quality technology that supports various devices. We were also able to improve retail quality under we network environments to better meet users' requirements for clarity and smoothness, optimizing their event willing experience. In addition, we produced commentary programs tailored to the Asian games e-sports events to provide new e-sport 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 continued 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 seatings 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. Live streaming revenues were RMB 1.53 billion for Q3 compared with RMB 2.02 billion primarily due to a decrease in the number of quarterly paying users of Huya Live 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 macro and industry environment and our proactive business adjustments, as well as the increase in off-line 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 licensing revenues.
If we exclude the impact of the reduction in content licensing revenues, as a result, of our amended licensing agreement for LOL matches 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 sales 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 e-sports 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, favorable 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 subsidies. As a result, operating loss was RMB 39 million for Q3 compared with operating income of RMB 12 million for the same period last year.
Interest and short-term investment 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 16 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 RMB 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 diluted 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 30, 2023.
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.
[Operator Instructions] Today's first question comes from Yiwen Zhang from China Renaissance. .
[Foreign Language] My question about our strategic transformation. It has been 3 months since we first introduced back in August. Could you guys discuss about this update there?
[Foreign Language]
[Interpreted] In August, we announced the key transformation of commercialization and plan to provide more game-related services including game distribution, game prop sales and game advertisements. In addition to meeting the needs of the game users on our platform and content consumption, it can also further meet the broader needs in game-related aspects, thus obtaining higher commercial value for these users. We believe that the main advantage of Huya in developing these businesses are the active game users and streamers on the platforms. The content output of the streamers and their interaction with users can help achieve more game-related services, and a close cooperation relationship between Huya and game manufacturers in terms of the content.
[Foreign Language]
[Interpreted] According to our plan, our main goal this year is to build the infrastructure needed for the new business, including the development of relevant functions and products. The connection of users Huya account and game accounts. At the same time, we would also establish new business cooperation with some game studios and games to reach cooperative business terms and to run through business processes. For instance, if we take it from the perspective of products and functions, we have now added the in-game item all function for the sale of game crop in Huya's live broadcast app. And we also realized the connection with the yellow shopping card function in the live broadcasting room. At the same time, we also upgraded the game center model for the distribution and in modal optimized download function and expand the game library that we have.
[Foreign Language]
[Interpreted] In terms of game for operation, we have reached cooperation with 8 games, including the Honor of Kings, CrossFire, Demi-Gods and Semi-Devils to mobile in terms of the selling of crops and carry out small-scale streamer cells. At the same time, we also began to explore the cooperation activities related to the sales of e-sports as well. For example, we have a streamer who carry out the first launch of the Honor of Kings skin suits and gain high attention from users on the platform. We also begin to try streamer customized skin suits and other products. We also made some initial cooperation with several games in game distributing, including the new Demi-Gods and Semi-Devils mobile and MapleStoryM, which was launched in August.
In terms of game advertising, we have tried to explore some deeper forms of advertising cooperation with game companies such as organizing our streamers to participate in the cross-platform brand exposure events. And for the currently popular mini games, we also pay more attention to the games advertising in the form of performance-based advertising.
[Foreign Language]
[Interpreted] At present, our overall progress in line -- is pretty much in line with our expectations. However, due to the limited number of cooperated games right now, the cooperation of these games are still in a small scale. The income and profit contribution of new business will be relatively small this year, but we also hope that after all the preparation work have been completed this year, the business scale of game-related services can be effectively expanded and more income can be obtained from next year.
The next question comes from Ritchie Sun from HSBC.
[Foreign Language]
I will quickly translate myself. Can management dissect the revenue impact from Huya's own strategic transformation as well as the operating adjustments to improve the regulatory compliance. And how does management feel the revenue trends in the future? And when can we see the new revenue streams to have a better growth profile?
[Foreign Language]
[Interpreted] The last quarter meeting, we mentioned that in the process of strategic transformation of our business in order to optimize the internal resources in a targeted manner, we will make some proactive adjustment to the existing live streaming businesses. At the same time, in order to create a healthier platform environment, Huya has recently taken the initiative to upgrade and optimize the content and functions on the platform. These adjustments caused the decline of our live streaming revenue in the third quarter. In addition, the overall industry environment and the users' willingness and affordability still need time to be fully restored, which has also affected our income level to some extent.
[Foreign Language]
[Interpreted] However, it is worth pointing out that we are actively optimizing the content cooperation and user experience in the third quarter. The impact of live streaming revenue was slightly smaller than the company's previous expectations. In the fourth quarter, we expect to continue to be affected by the above-mentioned factors. And because it is a complete quarter affected by the business adjustments. The year-on-year decline of live streaming revenue may be greater than that in the third quarter. We hope that after these adjustments, the live streaming revenue will gradually return to a stable trend.
[Foreign Language]
[Interpreted] In terms of advertising and other income, the third quarter was mainly affected by the decline in copyright income, which is due to higher amount of copyright income in the same period last year. Although the income of new business will be in a relatively small scale in the second half of this year, however, if we exclude the impact of the decline in copyrighted income, our third quarter advertising and other income level have achieved both a year-over-year and quarter-over-quarter growth.
When our preparations for the new game-related services business are completed, we expect that the new business income will increase faster next year and its proportion to the total income will increase. Our goal is still to strive to achieve a more balanced income structure by 2025 with the proportion of game-related services income accounting for about 30% of the total revenue.
The next question comes from [indiscernible] from Jefferies.
[Foreign Language] So I will translate myself. I asked a question on behalf of Thomas Chong from Jefferies. My question is what did Huya or Huya had done for the major event such as Asian Games and S13 and how it impacts on the Huya platform traffic? .
[Foreign Language]
[Interpreted] From the end of September to the beginning of October, Huya platform broadcasted the events of e-sports in Hangzhou Asian games including the -- when the e-sports became the first time as an official event in the Asian games. We cherish this chance of broadcasting the Asian games e-sports events. In order to better serve the audiences of the Asian Games, we have provided 4K HDR support across multiple devices for the Asian Games e-sports events, and through real-time super resolution image quality technology on the full devices side in order to ensure the clarity and smoothness of users viewing in a weak network environment. In terms of the content, we also made commentaries and comments on the e-sports events at Asian Games to help the users understand the corresponding events.
[Foreign Language]
[Interpreted] The e-sports events of the Asian Games has received extensive attention from users on our platform amongst which the peak concurrent users or PCU of League of Legends and Honor of Kings related to Asian Games events ranked among the top 5 in the third quarter.
In addition, because of the influence of Asian games and its rich content of e-sports and events, it has also helped us to attract some new users. We hope to maintain these users through the high-quality and diversified content provided on our platform. On the whole, due to the short duration of the Asian Games, the positive impact on quarterly MAU was diluted.
[Foreign Language]
[Interpreted] The League of Legends World Championship is an important event in Q4. Huya has broadcasted this event for 6 consecutive years, gradually cultivating the audience's awareness of the event brand and also cultivated the habit of watching it on Huya platform from the professional event users. We continue to focus on users viewing and interactive experiences in order to provide industry -- in addition to providing industry-leading broadcast quality, this time, we also provide users with professional event services such as customized reservation services, game watching assistance and MVP voting functions and other interactive functions. In addition, we'll better enhance the attention and user loyalty of the events by combining online and offline operations on Huya's PGC programs.
[Foreign Language]
[Interpreted] This year's S13 competition has not yet completed ended. We're very glad that 1 team from LPL made it into the final, and we look forward to their great performance in the final. So far, the overall viewing data of this event is quite good, including the number of users and other key metrics, which have increased compared with S12 in the year of 2022, it has also -- we will continue to maintain the leading market share. We will also further evaluate the impact of this event after the event closes up.
The next question comes from Lei Zhang from Bank of America.
[Foreign Language] My question mainly regarding margin trend, specifically, we have some seasonality impact for Q4 historically. So can you give us more color on the margin trend for Q4? And if any preliminary target for the profit in 2024 will be appreciated.
[Foreign Language]
[Interpreted] In the third quarter, we continued to work hard to control the cost and improve the efficiency. The cost related to streamers and bandwidth were optimized. And therefore, despite the decline in income, the gross profit rate showed some resilience, reaching 13.9%. We also continue to control various operating expenses, especially the sales and administrative expenses. In the third quarter, the total operating expenses declined by 20% year-over-year or 8.7% quarter-over-quarter and achieved a net profit under GAAP and non-GAAP.
[Foreign Language]
[Interpreted] In the fourth quarter, due to the concentrated schedule of large events, especially the League of Legends S13, our event costs will increase significantly compared to the third quarter. Therefore, these seasonal factors will continue to play a role and may lead to a quarterly loss. However, due to the overall optimization of content costs and continuous streamlining of operating expenses over the entire year, it is expected that the loss in the fourth quarter of this year will be less than the same period last year.
[Foreign Language]
[Interpreted] From what we can see currently, because the company's profit level in the first 3 quarters is better than previously expected, we expect that non-GAAP net profit level in 2023 will turn a positive with a small profit level, which is also ahead of our previous expectation of a breakeven time for the year.
For the year of 2024, we hope that with the increase of the proportion of game-related services businesses, which, by the way, has a higher gross margin level than the existing live streaming business and with cautious and continuous optimization of content cost and operating expenses, we can further enhance the profitability level of our company.
Now we will take our last question today. It is from Ivan Su from Morningstar. .
[Foreign Language] Can you share more of your thinking on shares buyback? Will you accelerate your buyback going into the next few quarters? And lastly, can you share your plan on spending down your strong net cash position?
[Foreign Language]
[Interpreted] Middle of August, we announced a plan of buying back of up to USD 100 million worth of shares in the next 12 months. We also hope to use cash more effectively and show the confidence of the Board of Directors and management of Huya and the future development. And as of September 30, we had bought back shares worth $9 million. We will continue to implement the buyback plan in good place so as to improve shareholders' value.
[Foreign Language]
[Interpreted] Regarding our usage of cash under the current macro environment and competitive climate, we believe that holding enough cash is conducive to maintaining a competitiveness of Huya. On the one hand, we'll continue to invest in content technology products as well as overseas markets. On the other hand, we will remain open to investment or mergers or acquisitions in the upper stream or downstream of our ecosystem and carefully consider possible potential opportunities. We would also dynamically adjust according to the company's operating conditions and market climate. At the same time, we will also seriously consider various forms of return to our shareholders, including repo or dividends, in order to repay the long-term support of our shareholders and improve the efficiency of our cash.
Thank you once again for joining us today. If you have further questions, please feel free to contact Huya's Investor Relations through the contact information provided on our website or Piacente Financial Communications.
This concludes today's call, and we look forward to speaking to you again next quarter. Thank you.
[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]