Hello, ladies and gentlemen, thank you for standing by for the 2020 Third Quarter Earnings Conference Call for HUYA Inc. 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 Third 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 then 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'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. SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable laws.

Please also note that HUYA's earnings press release in 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. We achieved solid results this quarter and excitingly the investments we have made in content, products and services are continuing to drive the growth of HUYA’s businesses and user communities.

In Q3, our total revenues grew by 24% year-over-year to RMB2.8 billion, while our gross profit increased by 53% year-over-year to RMB621 million, keeping us in a strong position to fund our future growth and capture the opportunities ahead.

Despite a relatively shorter summer vacation period due to the impact of COVID-19 in China, the average MAUs of HUYA Live still grew to 173 million in Q3, a net addition of over 4 million from last quarter and up 18% year-over-year.

Additionally, on average over 25 million users each month during the quarter watched HUYA’s live streaming content across Tencent and other third-party platforms nearly doubled last quarter. Altogether, we provided our compelling content to close to our average of 200 million users every month in Q3.

The growth was mostly driven by the increase in e-sports tournaments, as well as a deeper cooperation with Tencent. In Q3, our live streaming content was broadcasted in Tencent’s various products, such as QQ Mobile, WeGame, WeChat, Game Center and YoYo game.

Specifically, our live streaming content related to the Q2 the Labor Day All-Star Tournament attracted a larger number of users towards – in QQ mobile.

Our mobile MAUs of HUYA Live reached 74% - 74 million in Q3, representing a year-over-year growth of 17%, but slightly lower than last quarter because of the relatively shorter summer vacation period and a higher base for the first-half of the year due to the impact of COVID-19.

However, our HUYA Live apps next month retention rates continuously stabilized at over 70% in Q3. Our success in delivering solid financial results and the continuous user growth underscores our capabilities in driving monetization and user engagement.

Our thriving community reflects our team’s continuous efforts, along with deeper cooperation with Tencent to enrich content and make our products and services more innovative and attractive, delivering even greater value to ensure a superior user experience.

In September, we upgraded our HUYA Live app to the 8.0 version, featuring normal functions such as live events, instant playback, and the prime video clip generation and sharing, smart AI assistant and real-time monitoring panel.

With these new functions, users are allowed to choose any specific time interval within a live streaming event to the play, mark the e-sports event highlights and generate video clippers from live stream to share with friends.

Furthermore, there is a smart assistant on top of the app featuring AI-enabled interactions to enhance users’ viewing experience. Meanwhile, our technology cooperation with Tencent also allowed us to create a real-time monitoring panel for e-sports tournament broadcasting.

With this new panel, our hardcore viewers could obtain more information on the tournament and better analyze the game playing status. We believe these upgrades represent an exciting opportunity to innovate, provide new experience for our users and grow our user base.

In October, we formed a joint venture with Tencent to carry out joint technology efforts in various fields, such as AI security applications, irregular activity detection, data security and data undertaking. We believe we can work together to improve AI-driven compliance on the platform and improve the health of the industry.

Since we launched our open platform for third-party application developers in November last year, we have empowered a growing number of third-party developers to develop tools to be used in HUYA’s products, mainly to improve interactions between broadcasters and the users.

It’s being almost a year now and we are glad that there have been around 160 tools developers and over 300,000 broadcasters have used these tools by end of Q3. We are confident our open platform will develop the interactions between broadcasters and users with innovative and dynamic features.

During the most recent LoL World 2020 that was concluded end of October, we introduced new features and functions to help make the S10 broadcasting on HUYA more innovative, immersive and game integrated. In addition to our upgraded 8.0 app, we also provide users high-definition and latency-free viewing experience in 4K.

We introduced our virtual broadcast, Hulu, to interact with real person broadcasters and viewers to improve experience. We also launched Tencent supported S10 live viewer passport.

Having this viewer passport, users are of HUYA will be able to gain awarded gadgets, game accessory items or game schemes within AOL once they have completed certain engagement activities. During tournament, wearing [ph] on HUYA, such as sending quality checks, virtual gifting or real impact.

Lastly, I would like to share some of my thoughts on the ongoing merger with DouYu. On October 12, 2020, we announced with DouYu that we have entered into a merger agreement, where we plan to acquire all the outstanding shares of DouYu through a stock-for-stock merger.

Once the merger is effective, each ordinary share of DouYu will be exchanged for 7.30 Class A ordinary shares of HUYA, and each DouYu ADS will be exchanged for 0.73 HUYA ADS. If the merger is completed, the shareholders of HUYA and DouYu will each hold approximately 50% of the shares of the combined company on a fully diluted basis.

Concurrent with the merger, DouYu will buy Penguin e-Sports from Tencent for US$500 million. We believe the potential combination will allow us to build on our complementary strengths, achieve significant synergies, and create more value.

By joining together with DouYu and Tencent’s professional team, we are solely defining our dedication to the pursuit of constructing a comprehensive online destination for game and e-sports-related content. With that, I will now turn the call over to our CFO, Catherine, to share her insights on the operating metrics and financial details.

Catherine, please go ahead..

Thank you, Mr. Dong, and hello, everyone. Following Mr. Dong’s remarks, I will start from the updates on content enrichment and diversification. In Q3, we broadcasted 119 third-party e-sports tournaments. Among which, the top tournaments included our awards 2020, LPL 2020 Summer, HoK World Champion Cup, LCK and KPL for 2020.

Total viewership for these tournaments reached a historical high of around 785 million in the third quarter, representing 40% year-over-year growth. On the front of our self-produced content, we organized 34 e-sports tournaments and entertainment shows and generated a total viewership of 100 million, representing 32% year-over-year growth.

Following its success last quarter, HUYA’s Destiny Cup Season 7 maintained its growth momentum and brought in more users than last season. Additionally, HUYA All-Star Cup Summer 2020 also performed well and built itself a signature event or peacekeeper in light on HUYA’s platform.

On the entertainment PGC show side, GodLie Season 5, a long-standing werewolf game show, All-Star Idle Academy, a talent show and HUYA Kung Fu Carnival Season 2, a mixed martial arts competition, were the top-performing shows, as we continued our dedicated efforts in the non-gaming entertainment content.

Talking about the traffic in this quarter, our average MAUs increased by 18% year-over-year to a record high of 173 million and average mobile MAUs reached over 74 million, representing an increase of 16% year-over-year.

The paying users of HUYA Live increased by 13% year-over-year to 6 million in third quarter but decreased slightly compared with 6.2 million in the second quarter. The number of our paying users is typically directly associated with the number of our mobile MAUs.

The fluctuation in our mobile MAUs this quarter, which was due to the short-term summer vacation period from the COVID-19 impact, resulted in the quarterly fluctuations in our paying users. The live streaming revenue per paying user for HUYA Live remained strong and increased both year-over-year and quarter-over-quarter.

For our overseas business, we achieved over 30 million MAUs in the third quarter. The better-than-expected growth was mostly because we introduced more e-sports tournaments, attracted more broadcasters and deepened our relationship with local game developers. Next, I will walk you through our financial highlights.

In Q3, our total net revenues grew by 24% year-over-year to over RMB2.8 billion. Our live streaming revenues increased by 23% year-over-year to close to RMB2.7 billion in Q3. The growth was primarily due to the increase in number of paying users and the increase in revenue per paying user, both of which have expanded.

Advertising and other revenues increased by 45% year-over-year to close to RMB158 million in the third quarter, primarily driven by the increasing and diversifying number of advertisers. Our profitability continued to improve this quarter given the leverage we have in bandwidth cost and our operational efficiency.

Our non-GAAP gross margin improved to 22.7%, compared with 18.3% in Q3 2019. Our non-GAAP operating margin was 11.8%, compared with 6.5% in Q3 last year. And our non-GAAP net margin was 12.8%, compared with 9.1% in Q3 last year. Now, let me move on to our financial details.

Cost of revenues increased by 18% to RMB2.2 billion for Q3, primarily attributable to the increase in revenue sharing fees and content costs, as well as personnel-related costs.

Revenue sharing fees and content costs increased by 21% to RMB1.8 billion in the third 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 decreased by 1.4% to RMB208 million for the third quarter, primarily due to improved management in bandwidth costs and continued technology enhancement efforts. Gross profit increased by 53% to RMB621 million for the third quarter.

And gross margin increased to 22% for the third quarter. Research and development expenses increased by 35% to RMB183 million for the third quarter, mainly attributable to increased personnel-related expenses. Sales and marketing expenses increased by 18% to RMB144 million for the third quarter.

The increase was primarily attributable to the increased marketing expenses in the summer to promote the company’s content, products, services and brand name, as well as increased personnel-related expenses.

General and administrative expenses increased by 23% to RMB119 million in the third quarter, mainly due to the increased professional fees associated with the company’s ongoing merger process with DouYu. Operating income increased by 249% to RMB223 million for the third quarter. And operating margin increased to 7.9% for the third quarter.

Non-GAAP operating income, which excludes share-based compensation expenses, increased by 125% to RMB331 million for the third quarter. And then non-GAAP operating margin increased to 11.8%. Income tax expenses increased by 82% to RMB51 million for the third quarter. Net income attributable to HUYA Inc.

increased by 105% to RMB253 million for the third quarter. Non-GAAP net income attributable to HUYA Inc., which excludes share-based compensation expenses, increased by 75% to RMB361 million for Q3. Diluted net income per ADS was RMB1.05 and non-GAAP diluted net income per ADS was RMB1.5 in the third quarter.

As of September 30, 2020, the company had cash and cash equivalents, short-term deposits and short-term investments of RMB10.8 billion. Along with the merger announcement, Mr.

Dong mentioned earlier, our Board of Directors also approved a cash dividend in an aggregate amount of US$200 million to be paid on or around the date of the closing of the merger to the holders of ordinary shares of HUYA, including the holders of ADS – HUYA ADS holders, as of the business – as of the close of the business on certain record date after the date when the required DouYu shareholder approval is obtained and prior to the closing of the merger.

Such record date and payment date will be designated by HUYA’s authorized officer and will be announced in due course. Here’s another update that just happened today. We obtained the usage right today to a piece of land with an area of approximately 29,258 square meters in Foshan City, Guangdong Province, through a public auction.

The company’s winning bid price was approximately RMB310 million. The company intends to develop office space on the land in order to accommodate future work force expansion and reduce long-term operating costs and expenses. With that, I would now like to open the call to your questions..

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. And our first question comes from the line of Thomas Chong of Jefferies.

Please go ahead..

[Foreign Language] Thanks management for taking my questions. My question is more about the 2021 outlook, in particular, in terms of the user growth, revenue and profitability trend, as well as how we should think about the synergies with Tencent and DouYu, if there's any color at this stage? Thank you..

Thank you, Thomas. I will answer your questions. Currently, we're still in the process of the ongoing merger and that we expect the merger could be possibly completed in the first-half of next year. So at this stage, it's still too early for us to tell the quantitative impact of the merger.

So I think, we probably would not be able to give you quantitative measures on this. But for the big direction, we still intend to grow our users and explore new monetization opportunities and grow revenues and also improve our operational efficiencies.

In terms of the potential synergies with DouYu and Penguin, we think, there are several directions that could generate synergies such as leveraging our content over a larger user base to attract the users and also to develop new products and together explore new monetization opportunities and also to achieve some operational efficiencies. Thank you..

Thank you. .

Thank you for the questions. Next question comes from the line of Vincent Yu of Needham and Co. Please go ahead..

Thank you. Thank you management for taking my question. My first question is about the content strategy.

How should we think about HUYA's content strategy going forward, especially after the merger? Or will we see a shift from our current gaming plus pan-entertainment content offering? Second question is on the users’ willingness to pay on that we're wondering do we see any change in our top-paying user cohorts or for the user cohort in different categories like gaming and for other entertainment category.

So are we seeing any change after like considering the COVID has mostly like only in China? [Foreign Language].

[Foreign Language] Okay. I will translate for Mr. Dong. Regarding our first question for our content strategy next year, actually, there are several respects to talk about. First one is that what we are aiming to do currently is we would like to construct a one-stop shopping concept for building up a gaming content-related family bucket.

So not only do what we are good at game live streaming, but also to include in videos and game community and game-related tools, adding that in total to our content and services offerings bucket. So that viewers and the users can have a one-stop shopping experience on our platform.

And secondly, specifically on the video strategy next year, actually, we have been doing our own research and roadmapping for the video business. And we have confidence that in two years – in the next two years, we will make the user base of our video business to a considerable level.

And my last point about the potential combination and its impact until our content strategy is that, actually, the two platforms, each of them has a very good pool of content quality. And as the contents are actually complementary to each other, as we – each of us has its own competitive advantages.

And in the year of 2021, what we are targeting at is to better consolidate the content offerings on each platforms and leverage the quality content to better serve the content – to better serve the game developers, the broadcasters, the talent agencies, as well as the users.

So that game live streaming can play a better role across the industry value chain. So that's for your first question. I will - Vincent, I will answer your second question in terms of paying users. As you can see in the third quarter, our paying users ARPU has increased both year-over-year and quarter-over-quarter.

I think, generally, we are seeing a recovery from the – after the COVID-19 has waned in China. We will still continue to enrich our content and improve our monetization opportunities to increase our ARPU. But, of course, as you mentioned, different content categories has different ARPU and also there is seasonality for our ARPU.

So generally, in the first quarter, our ARPU would be a relatively lower due to the spring festival. And in the fourth quarter, typically, the ARPU would be higher given the annual monetization events. Hope I answered your questions..

Yes, thank you..

Thank you for the question. Next questions will come from the line of Binnie Wong of HSBC. Please go ahead..

Hello. Good evening, management. My question is actually on the overseas, right, overseas users on the Nimo TV. And then if you look at this quarter, right, versus last quarter, you also add a 3 million net debt, which I think is actually achieving that 30 million target a quarter earlier than I might expect earlier.

So if we look at this way what are the things that or maybe what are some of the strategies or use acquisitions that you have done this quarter to achieve this 30 million level? And also, what are some of the synergies that you might see with DouYu overseas in the futures? Thank you. [Foreign Language].

Okay. I will translate for Mr. Dong. Regarding your first question on the overseas, yes, it is noticeable that our overseas MAU user growth in this quarter is actually quite outstanding.

And as I spoke last time in the earnings call, what we are focusing in the overseas market this year is to better improve the ecosystem and to cultivate a better monetization model. So as with the last two years strategy what we are doing this year is that for the channel buy to acquire the new users. We are actually cutting down the cost for that.

So given that the channel buy has been cutting down we still achieved considerable user growth for the overseas business. It's actually proved our strategy to build out ecosystem to be effective.

So going forward, what we will strategically focus is not only just to focus a substantial user growth but more focus to build up and construct a healthy ecosystem. It actually has been the third year for us to develop the overseas business.

And we are starting to get the sense to understand how we can better build up the business in the overseas markets and what we will be focusing on in future is more constructing a healthy ecosystem and also improve the financial status of the overseas business.

And regarding your second question for the potential synergies, they still use combination, especially on the overseas market. I think right now whether it's for DouYu or for HUYA, the two parties are actually in a very early stage in terms of exploring the overseas market.

So what we'll do more right now is to focus more on the collaboration rather than to compete with each other. So I won't believe the potential combination will create synergies in the overseas business as well..

Sorry, may I just ask a very quick follow-up here. If you look at the margin side, right, like how do you see the overseas when at a certain point that it could become more profitable and longer time at a steady state, how will you see the overseas systems margins compared to domestically.

For your question, I think in October, we start to see one single country to achieve sort of relatively breakeven operating margin side. But we think for the entire overseas business, we probably still need to invest for the next few years because different countries have different – I would say user behaviors.

In some countries, the ARPU or the paying ratio would be higher than the other countries. So we think that in the next few years, it will still be at investment stage. But as Mr. Dong just mentioned, we will be focusing on building the eco – that the healthy ecosystem in each country by each country. Thank you..

Thank you..

Thank you for the questions. Next question comes from the line of Billy Leung of Haitong International. Please go ahead..

[Foreign Language] Thank you management for taking my questions. I have two questions. The first one is related to cloud gaming progress. Can management share a color on our latest development on this app? And the second question is on relatively new speech service, the game companion.

Can management share any latest developments here as well? Thank you..

[Foreign Language] Okay, regarding you first question on cloud gaming, actually what we want to highlight here is that the technology platform of this cloud gaming platform Yowa, is completely developed by our own R&D personnel.

And we have been spending a lot of time and great innovation has been made to reduce the latency and also optimize users’ experience while they are playing the mobile, playing the PC portal games on mobile devices through our Yowa cloud gaming platform.

Actually it was only yesterday that we have officially launched this Yowa cloud gaming platform after almost a four months of beta testing. And we have been powered as much – as many as a 100 heat game titles right now.

And what we are trying to achieve is that to optimize users’ reaching experience, for example, viewing angles ratio, just so that we can better play the game seamlessly and the smoothly through our cloud gamming platform and optimize user experiences.

As I said earlier before yesterday, the cloud gaming platform was only on beta testing, which is flyaway data has been we didn’t invest much into promoting this cloud gaming platform.

But for now given that it has been officially launched and can be downloaded through many app stores, we will try to better promote the cloud gaming platform and see if the market is ready for the user base to experience this cutting-edge technology to play games. And we believe there is huge opportunity lies ahead with those cloud gaming business.

And we will take every effort to realize the cloud gaming opportunities for our own business. But in the short term, we probably will just wait for a little bit of time to see if the users are ready to a massive switching to their experiences. And to try this cloud gaming platform to play games. And Catherine will take your next question.

And for your second question regarding game companion business, our game companion business is still experiencing a fast growth especially for our APP [indiscernible]. So we think it's relatively a solid growth for the game companion business.

Our game companion business because the revenue recognition policy is different from our virtual casino, we are only recognizing net revenues for game companion business. So even though the charge of the game companion business is pretty significant and then the revenue contribution is still relatively small.

But then from the accounting perspective the game companion business has much higher margins than the virtual gifting from pure GAAP accounting perspective. Okay. Hope this answers your question? Next..

Thank you for the questions. Our next question comes from the line off – sorry we have lost the requests. I’ll just proceed to take the next question from Daniel Chen of JP Morgan. Please go ahead..

[Foreign Language] I have two questions. The first one is on the – what the management is saying are the key opportunities in game stream and video industry in the next two to three years in the product side, and also on the monetization side? The second one is on the competition.

So what's our key competitive advantage against Kuaishou or Bilibili as both of them are quite aggressive in obtaining top hosts, top agency’s game broadcasting rights? And also Kuaishou has reached over 200 million game-streaming MAU which is quite large and also very aggressive in the investment is for briefing. Thank you..

[Foreign Language] Okay, regarding your question on the competitive landscape chasing you mentioned Kuaishou and Bilibili, I will start with the complication with Bilibili.

I think for Bilibili itself, the quotes browsed by transforming VTubers to the broadcasters has already come to an end, which is why we think the Bilibili’s impact to the traditional players of game live streaming industry as quite limited. And facing the competition is Kuaishou.

I think from what we have monitored internally, especially on the year-over-year growth, I think, their impacts to game live streaming business is also not so big, especially thinking about the ideas of course they are huge. But impact and its irrelevance is quite different. Here is HUYA’s points to facing this Kuaishou’s competition.

What we are doing right now, especially on the game live streaming side is that we focused more on the content building up the content library proactively, while Kuaishou business kind of [indiscernible] are focusing more on constructing a community kind of ecosystem that they have centralized policies for running the operations.

So historically, what we are good at is that HUYA has been in a very good alliance with the industry players, such as the talent agencies and the broadcasters. And as this has been our advantages facing, especially facing Kuaishou’s competition.

I think waging our leverages is kind of a collaboration with industry players to better improve the operating efficiency to drive user growth and to improve our monetization capabilities. That's it..

Thank you for the questions. In the interest of time the last question comes from to line of Lei Zhang of Bank of America. Please go ahead..

[Foreign Language] I would translate myself. Thanks management for taking my questions.

My first question is about League of Legends Season 10, can you share any color on Class A call engagement to our platform? And what's the drive to our gross margin in the fourth quarter? And secondly, on the regulatory spend simply, especially on live streaming new view and impact you can share with us. Thank you..

Thank you, Lei. As to the S10 we have noticed that the sort of the user bought our S10s compared to last year has increased. But then the incremental, I think, the growth in this year was relatively lower compared to last year. And for S10 because most of the S10 would hold in the fourth quarter.

So the cost for the S10 would be mostly recognized in the fourth quarter, which will have some impact on our gross margins compared to the third quarter.

And as to your second question, in terms of the authorities’ policies or guidelines, we are cooperating with the government and we understand some authorities or governments are trying to implement new guidelines.

We are actively discussing with the government and of course when the actual guideline is going to be issued, we will be cooperating and be in compliance with the guidelines. So we think if the guidelines, is going to be issued, then we will then value the impact of the business at that time.

But we believe that the government or authorities are trying to help the live broadcasting to better role in the long-term. So we don't think the impact for our business will be long-term..

Thank you..

Thank you very much. I'd like to turn the call back over to the company for closing remarks..

All right, thank you all for joining our earnings conference call today. And if you have further questions, feel free to reach out to ir@huya.com. And we look forward to speaking with you in the next quarter. Thank you. Bye-bye..

Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines. Thank you..