Hello, ladies and gentlemen. Thank you for standing by for the First Quarter 2021 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 like to turn the call over to Ms. Dana Cheng, Company Investor Relations. Please go ahead..

Hello, everyone, and welcome to HUYA's 2021 first 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 made under the Safe Harbor provisions of the US 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 US 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 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 Don. Please go ahead..

Hello, everyone. Thank you for joining our conference call today. We are pleased with the continued momentum we saw across our business in the first quarter, which sets us on our solid path to begin the New Year. Total net revenues for Q1 increased to RMB 2.6 billion, demonstrating growth of 8% year-over-year.

Despite the higher comparable revenue base associated with the pandemic lockdown period in Q1 2020, we continue to see new growth and believe that our relentless focus on content enrichment and product innovation will drive the future growth of our business and create more value for our users.

The user growth that we enjoyed during the pandemic and lockdown period has persisted, and we continue to bolster our user community. In q1, mobile MAUs of Huya Live reached 75.5 million, up slightly from the same period last year. Additionally, the retention rate of our Huya Live app remained stable at over 17% in Q1.

Mobile users have been the pillars of our business and our primary focus. In the fourth quarter this year, mobile users contributed to over 85% of Huya Live's live streaming revenues and they also constituted close to 80% of our core daily active users on Huya Live.

Our mobile first strategy has enabled us to become the industry leader and we plan to further emphasize and grow this constituency, focusing on mobile users as our primary user metric. We believe our investments in content and products will gradually pay off.

Our accumulated content has become the engine driving us forward, attracting new users and fulfilling more online needs as users are finding our platform to be proactively, more comprehensive, attractive and convenient. In Q1, we continued to reinforce our product offerings and the content library with a number of successful initiatives.

In March, we launched our open platform for interactive features to offer more innovative gameplay and improve the uniqueness of HUYA to game studios, broadcasters and viewers.

Our service of interactive features helping developers, including gifts [Foreign Language], viewer-led interactive games [Foreign Language], e-commerce, live streaming, one-click to join broadcasters' game play, one-click streaming [Foreign Language] and real-time monitoring panel [Foreign Language].

We believe the new features will not only strengthen our value proposition in the industry value chain, but also help shape a new model for game operations and improve our capabilities in monetization diversity.

As our first step, we cooperated with Peacekeeper Elite and embedded the interactive gameplay features within the game's live streaming and our Peacekeeper Elite channel.

For example, when a game broadcaster strikers are checking in or refuse certain virtual gifts, the live streaming room will be triggered to send out designated in-game rewards for viewers to claim.

The success of such new features has affected Peacekeeper Elite to both acquire new traffic and retain existing users and can also provide our viewers and broadcasters with more fun and immersive experience. Our open platform for third-party application developers also continued to expand in Q1.

By the end of Q1, there were close to 210 [indiscernible] developers and over 600,000 broadcasters that use these tools. On a quarter-over-quarter basis, the daily active users and daily active broadcasters, both of whom have used the third-party applications from the open platform, grew over 140% respectively.

In April, we signed our licensing agreement with Tengjing Sports and locked down the exclusive broadcasting rights in China for League of Legends Pro League, LPL; League of Legends Development League, LDL; and LPL All-Star weekend service, as well as related licensing rights from 2021 to 2025.

The acquiring this exclusive broadcasting rights will enrich our content offerings and strengthen our collaboration with Tengjing Sports to explore areas of opportunities. With that, I will now turn the call over to our CFO, Catherine, to share her insights on the operating metrics and the 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 Q1, we broadcasted 92 third-party e-sports tournaments, among which the top tournaments including LPL spring; PGIS, i.e. PUBG Global Invitational.S; and KPL spring.

Total viewership for these tournaments reached around 535 million in Q1, representing 41% year-over-year growth. On the front of our self-produced content, we organized 36 e-sports tournaments and entertainment shows and generated a total viewership of 195 million, representing 73% year-over-year growth.

Recall that in Q1 last year, COVID-19 impacted the schedule of third-party e-sports tournaments and the hosting of our own offline events. We're glad that tournaments and events are back, which is also reflected in the higher viewership. HUYA's game for Q3 events, i.e.

[Foreign Language], is the top performing self-produced event in Q1 that has leveraged the influence of HUYA's celebrity broadcasters to compete with professional gamers. Additionally, we organized the regional tournament for team fight tactics within HUYA's community and hosted the rising game [ph], accomplish another signature event.

On the entertainment PGC shows side, on the styling team, i.e. [Foreign Language], a fashion styling competition show, and Last Winner, a roleplaying detective show, are the leading examples of Q1.

Moving on to our overseas business, the MAUs of our overseas business was around 25 million in the first quarter, slightly higher than the same period last year. Our strategy has been shifted to focus on regions and countries with higher monetization potential.

And as a result, our overseas revenues almost doubled year-over-year and our overseas loss also narrowed down. Next, I will walk you through our financial highlights. In Q1, our total net revenues grew by 8% year-over-year to over RMB 2.6 billion. Our live streaming revenues increased by 5.2%, close to RMB 2.4 billion.

The growth was primarily due to the increased revenue of paying user. The number of paying users that was realized in Q1 reached 5.9 million compared with 6.1 million for the same period last year, mainly because the users spent more time per day and are more willing to pay on our platform during the pandemic lockdown period last year.

Advertising and other revenues increased by 55% year-over-year to close to RMB 230 million in Q1, primarily driven by revenues from content licensing. Our profits continued to improve in Q1. Our non-GAAP gross profit increased by 8% to RMB 531 million. Non-GAAP gross margin was 20.4%. Our non-GAAP operating profit increased by 7% to RMB 242 million.

Non-GAAP operating margin was 9.3%. Our non-GAAP net profit increased by 1% to RMB 266 million. And our non GAAP net margin was 10.2%. Now, let me move on to our financial details. If not specified, all growth rates are on year-over-year terms.

Cost of revenues increased by 7.9% to RMB 2.1 billion for Q1, primarily attributable to the increase in revenue sharing fees and content costs.

Revenue sharing fees and content costs increased by 14.1% to RMB 1.7 billion for Q1, primarily due to the increase in revenue sharing fees in relation to higher live streaming revenues and the increase in spending in e-sports content.

Bandwidth costs decreased by 24.4% to RMB 182 million for Q1, primarily due to improve management in bandwidth costs and continued technology enhancement efforts. Gross profit increased by 8.2% to RMB 514 million for Q1. Gross margin was 19.7% for Q1.

Research and development expenses increased by 27.6% to RMB 199 million for Q1, mainly attributable to increased personnel-related expenses. Sales and marketing expenses increased by 35.7% to RMB 145 million for Q1, primarily attributable to the increased marketing expenses to promote the company's content, products, services and branding.

General and administrative expenses decreased by 6.8% to RMB 84 million for Q1, mainly due to lower share-based compensation expenses. Operating income increased by 21.6% to RMB 162 million for Q1 and operating margin was 6.2% for Q1.

Non-GAAP operating income, which excludes share-based compensation expenses, increased by 6.7% to RMB 242 million for Q1 and non-GAAP operating margin was 9.3% for Q1. Income tax expenses increased by 4.9% to RMB 39 million for Q1. Net income attributable to HUYA, Inc. for Q1 increased by 8.4% to RMB 186 million.

Non-GAAP net income attributable to HUYA, Inc. for Q1, which exclude share-based compensation expenses, gain on fair value change of investments and equity investees' investments and equity investees' partial disposal of this investment, net of income taxes, increased by 0.9% to RMB 266 million.

Diluted net income per ADS was RMB 0.77 for Q1 and non-GAAP diluted net income per ADS was RMB 1.1 for Q1. As of March 31, 2021, the company had cash and cash equivalents, short-term deposits and short-term investments of RMB 10.7 billion compared with RMB 10.5 billion as of December 31, 2020.

The increase was primarily due to net cash provided by operating activities of RMB 166 million for Q1. With that, I would now like to open the call to your questions. .

[Operator Instructions]. Your first question comes from the line of Lei Zhang from Bank of America Merrill Lynch. .

[Foreign Language] Two questions here. First, can you give us an update, the real competitive landscape, especially the competition with Bilibili which saw good growth in live streaming in recent quarters? Secondly, any color on growth of our advertising and other revenue? What's the major driver here? Thank you..

Regarding your first question, for Bilibili, as a new entrant to the game live streaming industry, it is pretty natural for them to being a relatively higher year-over-year growth as it's still in the growth phase for them.

Especially thinking about that in the [indiscernible] both JOYY or HUYA also enjoyed an outstanding year-over-year growth as well. So, it is quite a natural thing to happen. And from our internal perspective, we don't really feel pressured or threatened by the entrance of [indiscernible].

And talking from the perspective of competition landscape, there's almost no change compared from the situation in the last quarter. And what we can do is to strengthen our own capabilities facing the current competitive landscape.

And we see more opportunities in the second half of this year because if you look back at the past one-and-a-half years, there weren't really many of the big games, especially the blockbuster games in the industry, which is why we are more optimistic and expecting more opportunities from the new game launches in the second half of this year.

And Catherine will take your next question. .

As for your question of the fast growth of advertising and other revenues, this is mainly driven by revenues from licensing of content. Hope this answers your question. .

We'll proceed to the next question from Vincent Yu of Needham & Company. .

[Foreign Language] I have two questions.

First is about what is our strategy for international market for this year? How much top line contribution will we see in this market will bring in 2021? And will we see our breakeven on a standalone basis in 2021? Second is, can management help us understand on the strategy around content investments in 2021? Will we focus on acquiring license for e-sport tournaments for in-house development of PDC content.

And can we share the size of investments we are ready to deploy? The third question is, how should we think about the recent wavers of antitrust probes brought by regulators? Can management share any process that we have for our [indiscernible]?.

Regarding our first question, for the international business, we're still at the investment stage. And we still expect we probably will continue to invest in the overseas business for the next couple of years. But the good news is that, this year, our strategy has been focused on improving our monetization.

So, in the first quarter, our overseas revenue has doubled year-over-year and we also expected that the overseas business revenue contribution will be increasing this year. At the same time, the loss of overseas business has also narrowed down both in terms of absolute dollar or as a percentage of revenue.

We think, in some country, we will be able to make breakeven point. But, overall, the overseas business is still going to be at the investment stage this year. And then, for the next question, I will relay to Mr. Dong to answer this..

[Foreign Language] Regarding your questions for content investment, since we have already talked about the progress of the current ongoing merger with DouYu, from what we can see right now, we will reach some sort of conclusion and see some progress in the future.

And given these circumstances, we think we might adjust the current strategy in terms of the content investment.

In terms of the balance play between the self-produced content and purchasing the third-party e-sports tournament, we think HUYA has been doing quite well in terms of producing its own branded content, whether in the form of non-gaming or in the form of game e-sports tournament.

For example, we have just recently hosted a new series of Huya Kungfu Carnival and it has seen a lot of attraction among the among the Internet users, which is why we will not only focus purchasing the quality e-sports tournament from the third parties, but we will also solidify our capabilities to produce our own branding the content. .

Your next question is from Thomas Chong of Jeffries. .

Thank you, management, for taking my question. My first question is, could management provide some update about the cooperation with Tencent.

The second one is, could management comment on the strategy this year in game and non-game broadcasting?.

Regarding to your first question, this quarter, we have continued the collaboration with Tencent. For example, we also launched the open platform for our interactive features to offer more innovative game play.

The first game that we have cooperated is Peacekeeper Elite, and then the result was [indiscernible] in terms of increasing the users and also increasing the interaction between the users and then the platforms. At the same time, we continue to collaborate with Tencent in various ways such as games and also some of the major Tencent products as well.

So, we expect the collaboration with Tencent will continue to go on. And in the future, it will also bring us more users and also monetization opportunities..

[Foreign Language] Mr. Dong has answered your question regarding the content strategy. Firstly, we'd like to strengthen that. Huya is actually the platform in the game live streaming industry that has gained the vast majority of the third-party e-sports tournament customer rights. That is for the esports tournaments.

And for the professionally generated content, we also have gained the leading production capabilities among industry players.

And secondly, from a gaming perspective, we have to say that a lot of the new opportunities will be there for the new games in the second half of this year as it's quite likely that some of the potential blockbusters will be released in the second half of the year. And it's quite expected by the users to be interactions.

And thinking about how HUYA has a natural advantage and a strong capability to promote new games and operate the new game live streaming sessions on our platform, we will say the opportunities are [indiscernible] here in the second half of this year, which is why we're going to invest some of our resources on to promoting those new games.

And on the front of the non-gaming content, looking at the data in the past, the growth rate for the non-gaming content is actually higher than the growth rate of the gaming content. And our content pool for the non-gaming sectors are actually enjoying a prosperous growth over the past few quarters.

For example, traditional sports is actually quite outstanding in the past. And that makes us think whether we will need to invest into gaming, the third party non-gaming content broadcasting rights in future. That is also quite potential for us. So, these are our content strategy for the rest of the year. .

The next question is from Richie Fan [ph] of HSBC..

I have a question about game video strategy. So, how is the traction of game video strategy.

So, any operating metrics to update us? And with more and more game video users, how will that affect paying ratio and ARPU trends going forward? Can we assume game video users less hardcore and hence the paying ratio and ARPU will be lower?.

[Foreign Language] I will translate for Mr. Dong regarding your question for our video business. Our video business has been running for one or two quarters already and there has already been some new thoughts in terms of how to develop the new strategy for the video business.

As I said before, previously, we have been focusing on the on-demand videos to be involved with acquiring new users for the video business. That actually requires a longer time.

But thinking about the nature of Huya platform as a live streaming platform, we feel like – we always feel like rolling streaming sessions will be more natural form for HUYA to engage in the video business, which is why we have already tested with this new form of video business, the carousel [indiscernible] streaming business in the first quarter within one or two content categories of our gaming sectors.

And we have received positive feedback, whether from the data users or from the leaders of the industry value chain. And in the second quarter, we will extend the content category coverage from those one to two gaming sectors to more game titles in the second quarter.

And we believe with the big growth of our video business, that will actually help us strengthen our attractiveness as a platform to attract those advertisers and that will also help us to strengthen our monetization capabilities of the advertising business. .

We will take the final question from Tian Hou of T.H. Capital. .

What's the management's expectation for League of Legends to be online? And also, once that gets started, what is the potential impact to our game streaming business? Thank you..

[Foreign Language] For League of Legends mobile version, we actually started the preparation for that beginning from earlier this year. And we have already sorted out all the potential professional leagues [indiscernible] that we can gain on our platform.

And we also quite emphasize the communications with the [indiscernible] and the repeat players of the new game. And hopefully – and it's quite likely that the League of Legends mobile version will be released in the second half of this year.

From our own perspective and thinking about this analogy, it is just quite favorable for us if the game can be launched in the summer school holiday season..

There are no further questions now. I'd like to turn the call back over to the company for closing remarks..

All right. Thank you all for joining our conference call today. If you have further questions, feel free to contact ir@huya.com and we look forward to speaking with you in the next quarter. Thank you. .

Thank you. This concludes this conference call. You may now disconnect your line. Thank you..