Hello, ladies and gentlemen. Thank you for standing by for the Third 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'll now turn the call over to Ms. Hanyu Liu Company Investor Relations. Please go ahead..

Hello, everyone and welcome to HUYA's Third Quarter 2021 Earnings Conference Call. The Company's financials and operating results was 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. Ashley Wu, Vice President of Finance. Management, will begin with a 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 provision 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 prospectors 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 under applicable law. Please also note that Huya's earnings press release and this conference call include discussions of our audited GAAP financial information, as well as our audited non-GAAP financial measures.

Huya's press release contains a reconciliation of our audited non-GAAP measures to the audited, 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. In the Third Quarter of 2021, we achieved together solid results. Our mobile units reached a record-high levels and we continue to steadily grow our topline. Huya Live's mobile MAUs reached 85.1 million in the Third Quarter up 15% year-over-year and 10% quarter-over-quarter.

Strong user growth was mainly driven by our comprehensive content offerings of operational activities and continued promotion efforts during the summer E-sports events. The next segment retention rate for our Huya live app also remained single and over 70%.

As a technology-driven platform, we have been continuously focused on product and service upgrades to deliver more fun and immersive experience to our users. In particular, we actively promoted the development and application of more interactive features in live streaming.

Supporting broadcasters ability to produce quality content more conveniently, as well as it makes it easier for our users to participate while viewing live streams. I will now provide you with some updates on those initiatives. Our open platform for third-party application the work has been up and running for almost 2 years.

By the end of September, more than 290 tours had been toured on this open platform, and over 888,000 broadcasters covering our core categories including E-sports, tournaments, games and [Indiscernible] entertainment had to use the [Indiscernible].

In particular, the recently added data capabilities for more multi-user participation, such as draw and get-together, [Indiscernible] are now quite popular. More users can join the streaming and interaction and gifting and the dollar chips sent by users can also influence better results.

These increases the interactivity between broadcasters, helping users to effectively level up and strengthen the monetization capabilities our broadcasters. In August, we introduced our feature called [Indiscernible] one click to join broadcasters, game play [Indiscernible] It was first applied in PeaceKeeper Elite channels.

With this interactive gaming functioning, users can team up with streamers to play games while launching live streaming sessions. The gift drop feature we released earlier this year is now available in more games, including the latest LOL Wild Rift.

Through our cooperation with game studios, gift drop will be triggered in a live channel for users to claim game tours and schemes after downloading this new game.

Achieving a certain length of viewing time or when broadcaster strikes a certain queue, it enhances the engagement in the streaming sensing as well as participating pacing of the game itself. We believe the introduction of this interactive feature not only offers more innovative game play for our users and the broadcasters.

It also improves the uniqueness of HUYA to game studios. More importantly, it opens up more opportunities for our deep penetration in the game value chain.

In terms of streaming technologies, we recently added HDR support to our E-sports tournament streaming, enabling users to enjoy more dedicated game scenes compared to the existing ultra HD experience. While leveraging our self while recognizing technology for game live streaming.

The newly launched AI caption function identifies accurate game terms, as well as player and team names, and provide real-time subtitles for live events together with our live event instant playback.

There's simultaneous multi-screen viewing functions, we were able to provide the best tournament building experience so far in the recently concluded 2021 season of League of Legends World Championship.

Supported by the above-mentioned data, technologies and our operational expertise, we continued our leading market share in broadcasting world's 2021. In light of the dynamic business environment, it is pivotal for us to strengthen our competitive advantages.

This primer really reside in fostering and retaining streaming talent, in reaching and producing quality content and that delivering technology and product innovations. We are also confident that we can capture the opportunities brought by the new game launches. In recent quarters, there has been more regulatory attention surrounding our industry.

We believe that the intention is to better regulate the space and promote it's healthy long-term development.

We have been closely monitoring and following the regulatory guidelines and we will continue to strengthen our operations in accordance with the regulatory requirements despite of the potential impact our regulatory changes on our near-term growth, we believe in our agility and ability to remain competitive and relevant to create long-term value as we continue investing in quality content, upgrading products, delivering yields are growth, improving monetization, and solidifying our leading position in the game live streaming market.

With that overview, I will now introduce our VP of Finance, Ashley Wu, who has been with Huya for years and has extensive Company and industry knowledge. She will provide you with our operating metrics in more detail and our financial assessment. Ashley, please go ahead..

Thank you Mr. Dong, and hello everyone. Following Mr. Dong's remarks, I will start with an update on our content enrichment and diversification initiatives. E-sport is at the core of our content ecosystem and we have been committed to bring more high-quality and popular E-sport content to game enthusiasts.

During the Third Quarter, we broadcasted 131 third-party E-sport prominence, generating total viewership of 590 million. LPL Summer, Honor of Kings World Champion Cup, and LCK Summer were among the most watched events in the Third Quarter.

Our exclusively broadcast comprehensive regional tournament, including national electronic sport tournament and E-sport Championships East Asia were also welcomed by users. Although some key license events were temporarily delayed during the season, we added more professional, comprehensive content in comparison with last year's schedule.

In the Third Quarter, we broadcasted 58 self-produced E-sport tournaments and entertainment PGC shows, and total viewership reached 142 million, growing over 40% year-over-year. Among the E-sport tournaments that we produced, the HUYA All-Star Cup, Huya [Indiscernible] has become a signature event for PeaceKeeper Elite.

In these event's summer season, we invited top professional players and well-known broadcasters from multiple live streaming platforms in China as well as several international teams to team up and compete, making it especially popular.

During this period, we also hosted the World Cup [Indiscernible] for CrossFire Mobile, CrossFire HD, [Indiscernible] and Naraka Bladepoint, all of which further complement the content for those game titles already on the Huya platform gaining even more traction with game lovers.

Notably, our [Indiscernible] cup for LOL [Indiscernible] held in August quickly attract users attention before the formal launch of this much anticipated game. In addition, during the period of HoK World Champion Cup, we produced the complementary program [Indiscernible] integrating professional game play analysts with variety show.

It is the first of its kind for this HoK tournament. We believe it was a success, attaining a viewership of over 12 million during the Third Quarter.

On the entertainment TGC program front our long-standing GodLie Season 6, [Indiscernible] a werewolf game show, and Huya Kungfu Carnival Season 5, Huya Kungfu [Indiscernible] a mixed martial arts competition, continues to be the top performing show.

In September, we introduced Huya Music Pub [Indiscernible] our first music scene invest into real program. This program invites well-known musicians to share their stories, further enriching our pan-entertainment offerings. We continue to strengthen our efforts for videos by encouraging streamers to also become video content creators.

In addition to the popular video-on-demand format. The video carousel their format [Indiscernible] which supports ongoing replace, is also well-liked on our platform as it use live streaming user habits.

In the Third Quarter, average MAUs who watch videos on our platform increased to approximately 14 million, representing quarter-over-quarter growth of 30%.

Moving on to our international expansion progress, the average MAUs of Nimo TV, our overseas game live streaming platform, increased to more than 28 million in the Third Quarter and the overseas revenues are just over 200% year-over-year growth.

The sequential user growth was mainly driven by certain regional E-sport tournaments, particularly in Southeast Asia. As we continue to deepen our relationships with local content providers and game companies, we are also refining our cooperation with local agent talents for more sustainable and healthy future revenue growth.

Next, I will walk you through our financial highlights. In the Third Quarter, our total net revenues were approximately RMB 3 billion, up 6% year-over-year. Our live streaming revenue, or RMB 2.6 billion in the quarter. A slight decrease from the same period last year, primarily due to lower average spending per paying user of Huya Live.

Partially offset by the increase in the overseas live streaming revenues, the number of paying users for Huya Live reached 6 million, which is flat compared with the same period last year. Nevertheless, our paying user numbers improved compared with the Second Quarter and were in line with our mobile MAU expansion trends.

The usual low spending from newly active playing users has resulted in a lower ARPPU in the third Third Quarter. Advertising and other revenues increased by 137% year-over-year to almost RMB 374 million in the Third Quarter, primarily driven by revenues from content licensing.

Profit levels in the Third Quarter were impacted as we set up investment in our content. Our non-GAAP gross profit was RMB 516 million non-GAAP gross margin was 70.3%. Our non-GAAP operating profit was RMB 154 million. Our non-GAAP operating margin was 5.2%. Our non-GAAP net profit was RMB $180 million with a non-GAAP net margin of 6%.

Now, moving on to our financial details, unless otherwise specified, the growth rates, I will reviewing are all on year-over-year term. Cost of revenues increased by 12.6% to RMB $2.5 billion for Q3, primarily attributable to the increase in revenue sharing fees and content costs.

Revenue sharing fees and content costs increased by 16.3% to RMB 2.12 billion for Q3, primarily due to the increase in revenue sharing fees in relation to certain broadcaster incentive programs and the increase in spending on E-sport content and content creators.

Bandwidth cost decreased by 14.2% to RMB 178 million for Q3, primarily due to improved bandwight cost management and continued technology enhancement efforts. Gross profit decreased by 18.8% to RMB 504 million for Q3, primarily due to the increased cost of revenues drifting by higher revenue sharing fee and content costs.

Gross profit was 18 -- 16.9% for Q3. Research and development expenses increased by 12.9% to RMB 206 million for Q3, primarily attributable to increase personnel-related expenses.

Sales and marketing expenses increased by 59.5% to RMB 229 million for Q3, primarily attributable to increased marketing expenses to promote the Company's content, products, services, and brand name, particularly including promotional activities for E-sport events in cooperation with various marketing channels during the summer vacation.

General and administrative expenses decreased by 32.6% to RMB 80 million for Q3, primarily due to lower share-based compensation expenses. As a result, operating income decreased by 62.7% to RMB 83 million for Q3. Operating margin was 2.8% for Q3.

Interest and short-term investments income were RMB 63 million for Q3, compared with RMB 76 million for the same period of 2020, primary attributable to decreased interest rates. Income tax expenses decreased by 90.9% to RMB 41 million for Q3.

Share of income in equity master investments, net of income taxes was RMB 379 million for Q3 compared with RMB 0.2 million for the same period of 2020, primarily attributable to the investment income related to a disposal equity investment.

As we disclosed in July this year, a private equity fund that Huya invested in as one of the limited partners enter into a definitive agreement to sell its minority stake in a gaming Company. Net income attributable to Huya Inc. was RMB 524 million for Q3 compared with RMB 253 million for the same period of 2020.

Non-GAAP net income attributable to Huya Inc., which excludes share-based compensation expenses and gain on fair value change and disposal of equity investments, net of income taxes was RMB 180 million for Q3 compared with RMB 361 million for the same period of 2020. Diluted Net Income per ADS was RMB 2.17 for Q3.

non-GAAP diluted Net income per ADS was RMB 0.75 for Q3. As of September 30, 2021, the Company has cash and cash equivalent, short-term deposits, and short-term investments of RMB 11.12 billion compared with RMB 10.74 billion as of June 20, 2021, primarily attributable to a cash inflow from the equity investment disposal mentioned above.

With that, I will now like to open the call to your questions..

Thank you. Ladies and gentlemen, [Operator Instructions ] For the benefit of all participants in today's call, if you wish to ask a question to Management in Chinese, please immediately repeat your question in English. Once again, ladies and gentlemen, [Operator Instructions ] Your first question comes from the line of Thomas Chong from Jefferies.

Please go ahead..

[Indiscernible] Thanks Management for taking my questions. I have two questions from my side. The first question is, can management comment about the performance of S11? And number two is about our expectation with regard to the user trend as well as the revenue expectation. Thank you..

[Foreign Language] The S11 actually took place last weekend. And we are more than happy to see that this event has caused sensational outcomes in the world of games. And we are very happy to see that another LPL team entered into the final and got the title in the end. And we believe that the influence of this event is expanding.

We're very happy to see that during this whole S11 period, Huya had continued our lead in the market shares. During this event, Huya had sought a number of new records made for the viewership, especially for PCUs. This year actually is 2 times of that from the last edition and it has also recorded as the highest PCU for Huya platform and its history.

During this tournament, we had launched operational activities together with Tencent and also we launched a mobile game based on the tournament. Both of these activities has delivered very nice results and we will continue to improve our live streaming technologies to optimize the viewer experiences.

The penetration rate of Huya and this event actually is the highest during the past 3 editions..

[Foreign Language] Now, Ms. Wu, I will tell -- I will talk about the users and revenue expectations in Q4 and next year. So overall speaking, we expect our users to grow continuously, and despite some seasonality changes, we believe that our investment in the content will help us to grow our viewership.

And also we expect some very positive impact from most recent new game launches, as well as tournament events. New games has always been a important source for our users.

And winning the title for S11 this time and also becoming -- for E-sport, becoming an official item in Asian games will both create very positive impact for our viewers and will help us to enter into a wider audiences population. So for the longer term, we believe that our potential user growth will have -- will continue to increase.

In terms of revenue, we believe that revenue to some extent is under the impact of the micro environment as well as live streaming sector as a whole. So our target is to keep a higher than average growth pace and continue to grow in years to come. That's it. Next question, please..

Thank you. Our next question comes from Yiwen Zhang from China Renaissance. Please go ahead..

Thanks for taking my question. I have a two question regarding LOL mobile. Firstly, it's exactly one month since when the game launched. Can you share more color on the new users from this title? And I guess if we make a reference to Honor of Kings and also [Indiscernible].

What is that gap between the game launch and a user coming into the platform? And then secondly, can you discuss the preparation we made for LOL mobile, including the stream recommend, and also our self-organized tournament. And additionally, how much incremental content cost do you expect to incur? Thank you..

[Foreign Language] You're right by saying that LOL mobile was launched about one month ago and Huya platform continued to take this significant market share. And right now the user or viewership performance is better than other games such as PUBG. But of course, we will continue to monitor their performances going forward.

This LOL Mobile is by no means replacing the users for LOL PC or HoK. Therefore, we have the right confidence of gaining more viewers and users from live streaming for this mobile game. In preparation for the launch of this game, we've done a lot of things in operation.

For instance, we had signed some live streamers as well as our working together with talent agencies in preparation for the launch. Since the launch, we had organized a number of tournaments and events in order to give opportunities for our live streamers to make their shows and make exposures.

We have now assigned over 1,000 streamers and also had signed a number of professional teams. Going forward that we would consider acquiring licensed tournaments in China for domestic leagues as well as the other key important tournaments on top of organizing our own tournament events..

Next question, please..

Thank you. Next question comes from Lei Zhang from Bank of America Merrill Lynch. please ask a question..

Hi. Two questions here. First is on margin trend. Can you give us more color on margin trend, especially any change in revenue sharing costs in our content costs? And secondly, wondering your updates on your strategy about E-sports tournament and how should we think about the tournaments-related costs in the future? Thank you..

[Foreign Language] In order to improve our competitiveness and better serve our users, we had step-up our effort in putting more resources in content since Q3, including by making more investments for our content creators as well as the self-produced, high-quality content, and licensed tournament content as well.

In terms of revenue sharing with our live streamers, in order to improve our competitiveness while maintaining the basics of revenue sharing mechanisms unchanged, we will also address and trying to give more incentives for the live streamers according to the market dynamics.

In terms of margin levels, well, there's some seasonality changes according to the scheduling of our operational events as well as the tournaments, especially in Q4 [Indiscernible] because there are a number of big events towards the end of the year. And also there are some transference of events and tournaments such as S11 auto plays in Q4.

So that has generated some impact on our tournament costs and also the operation costs with regards to contents..

[Foreign Language] So Mr. Dong will take the question with regard to tournament and its IP cost. Actually, we believe that E-sport are will continue to be very popular in a few years to come, especially with the S11 final title, as well as Asian games. So we believe that the costs for top tier tournaments will probably go higher in the future.

On the other hand, for some long tail tournaments or new tournaments really depend on the promotion of live streaming platforms. So the costs for these kinds of events will probably be quite flattish. On the other hand, we also noticed that self-produced content is also a very important source of content for Huya.

So for self-produced content as well as our own E-sport tournaments or our entertainment events, we believe that this kind of content creates a better value of money and it's quite unique to our platform so we will continue to invest in these areas and we hope to raise the percentage points from the current level to around 10% to 20% in years to come..

Okay. Next question, please..

Next question comes from Ritchie Sun from HSBC. Please go ahead..

[Indiscernible] So I will translate the questions myself. So firstly, I want to ask about the competitive landscape dynamic. How has that been trending? And without M&A and also ongoing intense competition, how should we think about the long-term net margin level for the platform.

Second question is, can you share about the progress made in game video? You mentioned the MAU of 40 million. So what about the user time spend, retention, as well as monetization plan? Thank you..

[Foreign Language] Mr. Dong on the question of competition landscape. Well, since we are not joining hands with DouYu and became competitors again, we believe that in recent quarters, the overall competition landscape for a game live streaming does not changed a lot.

Compared with DouYu, I think we have a much better operational efficiencies and we have outperformed in terms of users, as well as our revenues.

Even though our peers are making more and more investment in live streaming for E-sports, however, we are a professional platform for E-sports and we rely on our core competitiveness and continue to strengthen our positioning in this regard.

As I said before, we will continue to gain our market share and also to keep strengthening our advantages in live streaming for E-sports.

And over time, as we are accumulating more and more professional know-hows and experiences in running E-sports, we would love to have a more diversified business models and by relying on self-produced content, for instance..

[Foreign Language] Ms. Wu, on the question of video content production. But actually for videos, the user actually had increased. Since Q3, our MAU reached 40 million compared with the previous quarter of Q2, there is an increase of about 30%. We believe that video business is a natural extension to the live streaming business that we have.

A lot of video content originated from the events, tournaments, basically about editing and reproduction of the live streaming contents. I think one of our biggest advantage in this regard is that we have abundant resources in terms of content origins, and we have a very good ability of editing and reproducing them into videos.

In terms of the video content production, we encourage live streamers and talent agencies to make content -- to make a video content. And in terms of the products, we have launched a lot of new features.

For instance, we have this highly efficient editing features and we can use AI technology to identify the key moments and points, and generate our video clips are automatically. So this is a very positive feature that we have for producing content for software videos.

We can have the next question. Thank you..

Thank you. Next question comes from Bryan Gong from CTP. Ask your question..

[Indiscernible] I will translate myself. Can management share your latest view on the impact from the regulation of gaming and game live screaming, towards our operations and the fundamentals. And is there any change to our strategies post to the latest regulation. Thank you..

[Foreign Language] Thank you. As you rightly pointed out that in recent months, our industry has received quite a lot of attention from the regulators. And we believe the purpose of doing that is to better regulate the industry and to promote a healthy long-term growth.

We've been keeping an eye on the latest regulatory changes and to make sure that our business operation is in full compliance with those regulations. Even though there will be some short-term changes in terms of the revenue or user based growth because of the regulatory changes for the short-term.

But we believe that for the long-term we would be agile enough to mitigate the impact on our business and to actively address our product and operations to make sure that we can cater for the demands of the users and also at the same time be compliant.

That said, we will continue to invest in high-quality content production to upgrade our products, as well as to consolidate our competitiveness of the business as a whole. And for the longer-term, we believe that this will help us to better serve our clients and generate long-term value. Thank you..

Thank you. Our final question today comes from Tian Hou from T.H. Capital. Please go ahead..

So just want management give some color on your overseas business development, as well as your plan or some thoughts about the cooperation with Tencent going forward. Thank you..

[Foreign Language] Thank you. Ms. Wu, on overseas Nimo TV business. Well, thanks to the tournaments in overseas as well as local operational activities. Our MAU in overseas market reached 28 million. And especially we had a very stellar performance in the market of Indonesia.

And our revenue from overseas market also continued to increase by over 200% point year-over-year. Our main strategy going overseas is to continue to use the local partners to cultivate our overseas markets, and to expand our user base, and to enhance our monetization ability.

Since this quarter, we are redefining our cooperation with local talent agents and keep optimizing our cooperation with them. We believe that this will be positive for a healthy ecosystem building for the overseas market. We believe that for the short term, the overseas market will continue to be in the investment stage.

But the loss in overseas markets as a percentage points to margin level will continue to be lowered. So with our rate -- cooperation with Tencent, we truly hope that we can continue to deepen our cooperation with Tencent and our businesses, especially in area of games has been quite close.

This year, we had launched some new features such as keys dropping or one-click to join the broadcasters play games [Indiscernible]. This are to improve the interactivity of the live streamers and its users. And we had a first launched such interaction features in games by Tencent such as PKE and others.

And both from our side and from the game side had seen very nice outcome. In terms of a tournament, we had a long-term relationship with Tencent, for instance, by signing a 5-year agreement of cooperation for LPL. And this will help us to explore new ways of monetization..

Okay, that's it..

Right. Thank you. I would like to turn the call back to the Company for closing remarks..

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 TPG Investor Relations. Thank you..

Now this concludes the conference call. You may disconnect your line. Thank you..