Hello, ladies and gentlemen, thank you for standing by for the 2020 Second Quarter Earnings Conference Call for HUYA Incorporated. At this time, all participants are in a listen-only mode. Today’s conference call is being recorded. I will now turn the call over to Ms. Dana Cheng, company Investor Relations. Please go ahead..

Hello, everyone, and welcome to Huya's 2020 second quarter earnings conference call. The company's financial and operational results were issued earlier today and are posted online. You can also view the earnings press release by visiting the IR website at ir.huya.com. A replay of the call will be available on the IR website in a few hours.

Participants on today's call will be Mr. Rongjie Dong, Chief Executive Officer of Huya; and Ms. Catherine Liu, 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 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 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. SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable laws.

Please also note that we have earnings press release, and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. Huya's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures.

I will now turn the call over to our CEO, Mr. Rongjie Dong. Please go ahead..

Hello, everyone. Thank you for joining our conference call today. Huya has achieved outstanding results across our core businesses in the second quarter of 2020. Our total net revenues grew 34% year-over-year to RMB2.7 billion continuously exceeding our previous expectations.

Our gross profit grew 71% year-over-year to RMB575 million, further demonstrating our faster growth and improved profitability.

With the respect to the user traffic, despite the fact that people in China have largely resumed their daily work and the school schedules, we maintained the momentum that we built during the pandemic period in Q1 on the mobile end.

We accomplished a year-over-year growth of 35% for the mobile MAUs of Huya Live, reaching 75.6 million in Q2, as China come out and people's activities move towards normal day. Many offline Internet cafes have also reopened supporting the rebound of our non-mobile MAUs in Q2.

As a result, the average MAUs of Huya Live increased by 17% year-over-year to 168.5 million in the second quarter, representing a net addition of over 17 million from Q1. The growth was primarily driven by our dedication to continuously enriching our content offerings, while further improving the content quality.

Next, I would like to share with you some updates about the preliminary cooperation that we have started with Tencent, since Tencent became our controlling shareholder in April. Huya's live streaming content is now available within an increasing number of Tencent games and the products, which will help us tap into an extended pool of users.

Users who watched our live streaming content within Tencent games and products such as WeGame, WeChat, game center and QQ mobile game center, were not compared in Huya Live MAUs.

In addition to our Huya Live MAUs, average MAUs who watched Huya live streaming content on these external linkers, within Tencent games and the products increased by 16% in Q2 from Q1. We are also in the process of building exclusive one-click streaming services within some of Tencent games to attract more broadcasters, with a new service.

Tencent gamers can simultaneously stream their gaming experience through the click of a button and then essentially began our broadcasters.

In terms of the e-sports tournaments, we are also working together with Tencent in various dimensions, such as cooperation in e-sports tournaments content; traffic exposure for live streaming content, advertising opportunities as well as retail products to improve users' viewing experience of the e-sports tournaments.

Finally, but importantly, we have always been trying to stay nimble to meet the ever-growing demand of users while continuously diversing and expanding our products offering for long-term growth. Most recently, in June, we launched our cloud gaming platform called Yowa, offering over 40 game titles.

The platform made easier access for a broader audience to enjoy the fun of games and our long-term prospect for Yowa is to enable our users to play together with our broadcasters and enjoy unique interactive fun experiences. We have also strengthened our efforts for videos, mainly focused on middle length game videos.

In the similar quarter, average MAUs, who watched the videos on our platform, increased by 60% year-over-year to approximately 20 million. Our business is more diversified and all of these efforts will help us seize future opportunities and the emerging, in an even stronger position in the game live streaming market.

With that, I will now turn the call over to our CFO, Catherine, to share her insights on our operating metrics and financial details. Catherine, please go ahead..

Thank you, Mr. Dong, and hello, everyone. Following Mr. Dong's remarks, I will start with updates on content enrichment and diversification. From the broadcaster side, we have kept the momentum we built during the pandemic period in Q1. The number of average monthly active broadcasters remained at over 800,000, representing a 12% year-over-year increase.

In the second quarter, we broadcasted 102 third-party e-sports tournaments. Among which the top performers include LCK Spring Season, which we have gained three-year pose broadcasting rights as well as LPL Spring and Summer Season, PEL and KPL.

Total viewership for these tournaments reached a historical high of over 770 million in the second quarter, representing a 24% year-over-year. Another key part of our continued commitment is our self-produced content.

In the second quarter we organized 34 e-sports tournaments and entertainment shows, generating a total viewership of 112 million, representing a 36% year-over-year growth.

During the first half of this year, a scale of new users that were attracted to our platform by the self-generated content was comparable to the third-party e-sport tournaments we broadcasted. Among the e-sport tournaments that were produced, Huya Destiny Cup and then a fifth Huya Mobile Game Arena were the top ones.

The scale of their viewers and the new users, they brought to our platform, is comparable to some F-rated third-party official e-sports tournaments. On the entertainment show front, we produced a series of original PGC shows on our path to content diversification in this quarter.

For instance, we produced Attitude, a reality show discovering the in-depth stories of the game live streaming industry; Spring Experts, a music talent show that attracted enthusiasm and participation among our broadcasters; and High Streaming, a news show focused on e-sports broadcasters and professional leagues.

Thanks to our dedicated efforts to drive quality content offerings, in the second quarter our average mobile MAUs and MAUs reached record high of 75.6 million and 168.5 million, respectively. At the same time our Huya Live Apps next month retention rate still remained over 70% in the second quarter.

In line with the continued growth of our users, the paying users of Huya Live also increased by 27% year-over-year to 6.2 million in the second quarter.

The Live streaming revenue per paying user for Huya Live also increased year-over-year as we continued to unlock the monetization potential of our core user assets by effective operations of activities. Such as Huya Events Party, the online event we organized in June.

As we continue to grow globally, we reached over 27 million MAUs for our overseas business in the second quarter. The growth was partially driven by increased Internet usage as people were confined at home during the COVID-19 outbreak, similar to what we have experienced domestically in the first quarter.

Now let me walk you through our financial highlights. In the second quarter, our total net revenues grew by 34% year-over-year to RMB2.7 billion. This is the ninth consecutive quarter that we exceeded our expectations since our IPO.

One thing I would like to point out here is that our gaming companion business revenue is booked after deducting the revenue sharing fees for the broadcasters, while our virtual gifting revenue is booked before deducting the revenue sharing fees for broadcasters. We started the gaming companion business in the second quarter of last year.

So the difference in accounting treatment, previously, had minimal impact to the revenue growth. In recent quarters, it has grown more tangible. In the second quarter the gross billings generated from our businesses actually grew faster than our recognized net revenues.

Our live streaming revenues increased by 34% year-over-year, to around RMB2.6 billion in the second quarter. The growth was primarily due to the increased number of paying users and the increase in revenue per paying user, both of which have expanded year-over-year and quarter-over-quarter.

Advertising and other revenues increased by 49% year-over-year to RMB132 million in the second quarter, primarily driven by the increasing and diversifying numbers of advertisers. There's a slight decrease in advertising revenue from Q1, mainly because of the higher user base set by COVID-19 for gaming advertisers in the first quarter.

Our profitability continued to improve in the second quarter as we benefited from the savings in optimizing our broadcaster signing fees while we continue improving our operational efficiencies. Our non-GAAP gross margin improved to 21.9% compared with 20.3% in the first quarter and 16.9% in second quarter last year.

Our non-GAAP operating margin improved to 12.1% compared with 9.4% in the first quarter and 5.8% in the second quarter 2019. Our non-GAAP net margin improved to 13%, compared with 10.9% in the first quarter and 8.5% in the second quarter 2019. Now let me move on to our financial details with year-over-year growth rates.

Cost of revenues increased by 27% to RMB2.1 billion for the second quarter, primarily attributable to the increase in revenue sharing fees and content costs, bandwidth costs and personnel-related costs.

Revenue sharing fees and content costs increased by 24% to RMB1.7 billion for the second quarter, primarily due to the increase in revenue-sharing fees in relation to higher live streaming revenues and increased spending in content creators, e-sports and self-produced content.

The year-over-year increase was partially offset by benefits from economies of scale. Bandwidth costs increased by 35% to RMB265 million for the second quarter, primarily due to an increase in bandwidth usage as a result of our larger user base and enhanced live streaming video quality.

This was partially offset by improved efficiency in bandwidth utilization through continued technology enhancement efforts. Gross profit increased by 71% to RMB575 million for the second quarter, and gross margin increased to 21.3% for the second quarter.

Research and development expenses increased by 71% to RMB180 million for the second quarter, mainly attributable to increased personnel-related expenses. Sales and marketing expenses decreased by 4% to RMB150 million for the second quarter.

The decrease was primarily attributable to lower spending in marketing activities due to the impact of COVID-19 and partially offset by the increased personnel-related expenses.

General and administrative expenses increased by 61% to RMB120 million for the second quarter, mainly due to the accelerated share-based compensation expenses recognized in April 2020 in the event of a change of control. In terms of the total share-based compensation expenses, we also have a recent update to share with you.

In April 2020, we recognized RMB57.7 million of share-based compensation expenses in our cost of revenues and operating expenses from the accelerated vesting schedule of Huya's pre-IPO options in the event of a change of control, pursuant to our 2017 share incentive plan and option agreement.

Operating income increased by 198% to RMB201 million for the second quarter, and operating margin increased to 7.5% in the second quarter. Non-GAAP operating income which excludes share-based compensation expenses, increased by 180% to RMB326 million for the second quarter. Non-GAAP operating margin increased to 12.1% for the second quarter.

Income tax expenses increased by 137% to RMB51 million, for the second quarter. Net income attributable to HUYA Inc. increased by 86% to RMB227 million in the second quarter. And non-GAAP net income attributable to HUYA Inc., which excludes share-based compensation expenses, increased by 106% to RMB351 million for the second quarter.

Diluted net income per ADS was RMB0.96 for the second quarter and non-GAAP diluted net income per ADS was RMB1.49. As of June 30, 2020, we had cash and cash equivalents short-term deposits and short-term investments of RMB10.7 billion compared with RMB10.3 billion as of March 31, 2020.

The increase was primarily due to net cash provided by operating activities of RMB512 million for the second quarter. That concludes the review of our second quarter financials. As you may have noticed, we did not provide specific quantitative revenue expectation for the third quarter.

This change is in line with the practices of our largest shareholder, Tencent and its consolidated subsidiaries. However, directionally, we still expect our revenues to continue to grow in the third quarter both year-over-year and quarter-over-quarter.

Also here to update that we received a non-binding proposal letter from Tencent yesterday, proposing that Huya and DouYu enter into a stock-for-stock merger to be effected pursuant to applicable laws.

As a result of such proposal, Huya or its subsidiary would acquire each outstanding ordinary share of DouYu, including ordinary shares represented by ADS in exchange for a to-be-agreed number of newly issued Class A ordinary shares of Huya, including ordinary shares represented by ADS.

The independent and disinterested members of the Board will review and evaluate the proposed transaction. The Board just received the non-binding proposal letter from Tencent yesterday, and thus, no decisions have been made with respect to the company's response to the transaction. With that, I would like to open the call now to your questions..

[Operator Instructions] Thank you. Your first question comes from the line of Thomas Chong of Jefferies. Please ask your questions..

[Foreign Language] Thanks management for taking my questions, and congratulations on a strong set of results. I have two questions.

My first question is about the cooperation with Tencent in the second half and any KPI that can be shared in the next few years, given the solid progress is made in live streaming and e-sport? And my second question is about the user trend. Can management share about the MAU and the paying user outlook in the second half? Thank you..

[Foreign Language] Okay. As a translation, regarding the cooperation with Tencent actually, before Tencent became our controlling shareholder, we have already got the existing operation with them. After they became the largest shareholder of Tencent, the collaboration has been dependent in various aspects, so as being expanding over the few months.

In terms of the respect of the collaboration, firstly, I would like to say that we have already been connecting to Tencent's games and the products in the second quarter and there will be more to come, connecting with us more of Tencent games and products in the in the next few quarters.

And secondly, actually, Huya's live streaming content has already been connected in Tencent’s WeGame, WeChat game center and QQ mobile game center. And the traffic that we gained from those channels has now been counted to the reported total MAUs.

And this traffic from those external links, actually, got a quarter-over-quarter growth of 16 in the second quarter from Q1.

And thirdly, in terms of the call waiting of the broadcasters, actually, we have been collaborating with Tencent – some of Tencent's games to test an exclusive service built within Tencent games, which is called one-click streaming service, just so that when Tencent gamers play games – within – play games, they can simultaneously live stream their gaming experience through a click of a button.

And essentially, they will become now our broadcasters. And on the fourth respect, actually, we're also working with Tencent in terms of cultivating the e-sports tournament side. In addition to copyright licensing, commercialization and optimizing the viewers' experience by upgrading the product features.

We are also in collaboration and communications with PG Sports to see if there any more of the new products or new features or new business models can be applied to the e-sports tournaments. And on the technology side, we are working with Tencent to drive the development of Big Data and artificial intelligence technology.

And also, we are trying to connect it to Tencent database just so that with data at hand, we can optimize viewers' personalized experience by personalize the recommendations provided to them. And lastly, as you have noticed, we have recently launched our cloud gaming platform called Yowa.

And currently the game titles that is covered by Yowa is of great support from Tencent. So these are all the respect of collaboration with Tencent and Catherine will take your next question..

To your second question, in terms of user growth and paying user growth, as Mr. Dong just mentioned, along with the strengthening cooperation with Tencent as well as our investments in content such as broadcasters, third-party e-sports tournaments as well as self-generated content.

We believe that our users and paying users will continue to grow in the second half of this year. Hope this answers your question. And thank you and next..

Your next question comes from the line of Lei Zhang [Bank of America Merrill Lynch]. Please ask your question..

[Foreign Language] Thanks management for taking my questions and congrats on the strong results.

My first question still regarding competition, could you share with us your update to Yowa on the competition with short video players, especially like Qihoo, which announced certain game streaming related numbers; and Bilibili, which have all broadcasting rights for League of Legends Championship, Call of Duty, any near-term or long-term impact to our business? And secondly, it's about our profitability, which is better – much better-than-expected in second quarter.

Can you give us more color on this, specifically, the trend of your key cost items like our content cost and revenue sharing? Thank you..

[Foreign Language] Okay. As a translation, regarding your question about the competitive landscape in relating to Qihoo and Bilibili; actually, the two parties have been doing game live streaming for long. And recently, we have noticed that we have increased the investments in producing and preparing for such content.

But I would like to answer your question from two respects. Firstly, from the data that we have observed and monitored, I think the impact from either Qihoo or Bilibili, it's quite limited to Huya. And secondly, we also noticed that they have an inclination to live stream more focused on the mobile games.

And as you might know, we are quite strong in terms of streaming the mobile game titles. And we believe our competitive advantage of streaming mobile game titles is absolute, especially in broadcasting, Honor of Kings and Peacekeeper Elite. So we don't really think the impact is that much.

And about your question regarding the broadcasting rights for the Worlds Final of 2020 League of Legends, what we can say right now is that we are still in active communications with such parties to get the sublicensing right of broadcasting such e-sports tournaments.

But firstly, of course, we will like to get the sublicensing right of broadcasting Worlds Final of 2020 League of Legends because it's a very excellent e-sports tournaments.

But secondly, I'd like to see that; from what we have observed in the data monitoring, the new traffic or the user or the DAUs brought by the – if we don't get the sublicensing right from Worlds Final, the impact would be limited, especially considering that as we have disclosed in the prepared remarks, the self-produced content, whether in PGC or e-sports tournaments, the new users and the DAU, those traffic brought by as our self-generated content is already comparable to some of the, as repeated, West East tournaments.

So as a conclusion, we will try our best to get the sublicensing rights, but if we don't get it, we think it's still manageable. So Catherine will take your second question..

As regarding to the margin improvement, our gross margin improvement is primarily from the savings in optimizing our broadcaster signing fees. In the second quarter, we have cut cost of the broadcasters who have relatively low price-to-performance ratio, both domestically and overseas.

And thus, we have a pretty significant savings from the broadcaster signing fees. And in terms of operating margin improvement that was mainly – that was partially due to the operating efficiency improvement and also, we have received more government subsidies in the second quarter compared to the first quarter. I hope this answers your question.

Thank you. And next..

Your next question comes from the line of Yiwen Zhang of Citi. Please ask your questions..

[Foreign Language] Thanks management for taking my question. So the first question is regarding Tencent collaboration on user side. You mentioned that we have viewers on WeGame, WeChat game center and also QQ gaming center, which are not included in our reported MAU.

So any plan to convert these users into our app users? And also in terms of the user behavior, do we see any difference around these two user groups? And then my second question is a hypothetical one, if we do not consider competition factor, how do we view the future of China's game live streaming for the digestible user base and a new business model? Thank you..

[Foreign Language] Okay. As a translation, regarding your first question about the resources and the traffic that we gained from Tencent external links. As we have just said, Huya's live streaming content is now connected to some of Tencent's games and products.

And the major difference of the experience that you will have in those external links and within Huya's core app is that within those core – within those external links, those Tencent's games or products, the interactive feature and the virtual gifting feature will be limited. So the experience is not comprehensive.

Based on this, we are – we didn't count out the external links' traffic into the reported MAU.

But we are still in active communication with related project with teams of Tencent, just so that we can enrich and diversify the content ecosystem within Tencent's games and products, and probably in future, there might be a chance for us to share revenues with such related projects in Tencent future.

And secondly, your question on the competitive landscape, if theoretically, if hypothetically, we didn't consider the competitive – new competitors, new entrants.

Actually, we have been said that – we haven't seen that previously that with the new entrants of those short-form videos entering into the game live streaming industry, we have been seeing the new traffic and also the market size. Those two things have been growing after the new entrants of the short-form videos entering into the industry.

And we actually are very much appreciating that they have been helping us to educate the users. And in the first half, the total revenue generated by the game industry is actually enjoying the highest growth rates that we have seen in the past few months.

And this sets us to the conclusion that probably for the game live streaming industry, if we don't consider other factors to play same, the future of the industry, just based on the growth of the game industry, the future of game live streaming industry is already prospected in the future.

And my third point is regarding the e-sports tournament as we see popularity of the e-sports tournament in the industry over the past few years, it actually has already become a sensational activity among all the gamers, and probably also a must-have experience of the gamers.

So we think with the help of the e-sports tournaments and its popularity, it's also going to be beneficial to us at game live streaming industry for years. And also, my last point is regarding the combination of game live streaming content and game video content and – which we have been placing a lot of efforts in.

So going forward, what we would like to see is that one single user can actually enjoy different dimensions of content consumption on our platform, both in game live streaming and in game videos.

And with the quality product – with the quality content in the short-form – in the video production, we think Huya has its chance to grow the user base and carry that into the next phase of growth. So thank you, that's all, for the questions. Please move on to the next..

Your next question comes from the line of Alex Liu of China Renaissance. Please ask your question..

[Foreign Language] I'll translate myself.

Could the management talk about or provide more color on how we are work with Tencent, more closely on cloud gaming and the potential commercialization model of cloud gaming going forward? And also, secondly, just on the game host sign on fee, where does the management see this cost item to stabilize in the longer term?.

[Foreign Language] Okay. As a translation, regarding your first question about the cloud gaming, actually, the cloud gaming business for Huya or even for the industry, it's at a very early stage. And Huya has [indiscernible] such businesses.

Firstly, we will keep a close eye on the industry in terms of development and catching up with the various trends. And secondly, we will like to continuously optimizing user experience for our cloud gaming platform.

And from the data that we have seen right now, we think massive commercialization or massive monetization is still not there yet for Huya or for the business.

And secondly, from the data that we have observed in user behavior, we think the experience of cloud gaming platforms is at best to be combined with the live streaming experience, which means, probably in the future, we will provide more interactive feature to viewers' streaming experience by combining the content streaming together with the cloud gaming playing.

That's for the cloud gaming business. And regarding your signing bonus trend, actually, for Huya's business right now, the signing bonus fee for the broadcasters is not related to the browsings that a broadcaster can generate.

It's more decided by the quality content, one broadcaster can produce and also by the viewers that they can generate such as operating metrics as ACUs or retention rates. But if we take a step back and review your suggest channel like getting the gross incentives and a signing bonus fees together.

We think for the top streamers in the industry, they do – they are enjoying very high signing bonus fee, and we are actually thinking about to guide them to contribute more to the monetization or commercialization of the platform.

And I can cite an example for you is that in the e-commerce streaming business, actually, the quality and the top streamers in the industry, they can generate a very good amount of growth in that and they can contribute to the platform. So I think it's a very good example to apply to the game live streaming.

And encourage those broadcasters, those top broadcasters to contribute more and to participate more into the commercialization and monetization activities of the platform. Thank you for your question. We can move on to the next..

Your next question comes from the line of Binnie Wang of HSBC..

[Foreign Language] Now I'll just translate my question very quickly. So we observed that Huya MAU surpassed the DouYu this quarter. And then also, with that, margins has also continued in – with not much incremental cost.

So what are the key drivers behind the strong user growth with that much incremental cost? And then if you look at the user acquisition strategy this year, do you see the competition has been rationalizing and then so we should be able to see margins trajectory continue to be improving. Thank you management..

I will answer first question. In terms of MAU, the strong growth was mainly because in the second quarter because of the pandemic has pretty much domestically in China, has resided, and most of the offline Internet cafes has reopened.

As we mentioned in the first quarter's earnings call, in the first quarter because of the offline Internet Cafes has mostly being closed down, so we have lost some of the non-PC – non-mobile MAUs in the first quarter. And in the second quarter, that part of the users have picked up.

And in your second question, as for the proposed merger of Huya and DouYu, because we just received the proposal yesterday and the independent and disinterested members of the Board will review and evaluate the transaction. So from the Board perspective, there is no decision so far.

And we will update the investors, if there is significant milestones and there is a decision to be reached. Thank you. And next..

Your next question comes from the line of Wendy Chen of Goldman Sachs. Please ask your question..

[Foreign Language] Thanks management for taking my question. So I just have one quick question on the international expansion part.

So wondering can management show, what is our geographic focus area for the international expansion right now? And whether we have any update on the global active-users strategy, with all the potential headwind we have seen for the Chinese corporate overseas ever? And also, if there's an update, whether they will have any impact on our margin profile as we have been invested for international expansion?.

[Foreign Language] As a translation, actually, the overseas business we are deploying for this year is a little bit, compared with what we have paid in the year of 2018 and 2019. So in the past two years, what we have been focusing more is on the margin side growth.

But entering into 2020, we have been carefully evaluating the healthiness of the ecosystem and also emphasize more on the commercialization and return on investment. So in deciding, which country for us to entering this year, we focused more exploring a more reasonable ROI, which despite we didn't really enter United States.

And also speaking of India, since we believe the potential of revenue in India is quite limited, so we didn't really spend much money on that. We didn't really put a heavy investment in India. So that's for the business in those two countries.

Speaking of the countries that we have focused more is actually more centered in the Southeast Asian countries and Latin America, which we think is of great potential in both users and monetizations.

And taking that together with Middle East, those are the areas, yes, that we will be focusing more in the near future, especially considering that those countries will have a balanced play between user growth and monetization. So that's your question. Can we move on to the – Okay..

Operator, I think we have – it's about time and I would like to thank you again for joining our conference call today. If you have further questions, you can reach the team at ir@huya.com. And we look forward speaking with you in the next quarter. Thank you, operator. We can conclude the call..

This concludes today's conference call. You may now disconnect your lines. Thank you..