Hello, ladies and gentlemen. Thank you for standing by for the Second Quarter 2022 Earnings Conference Call for HUYA Inc. [Operator Instructions] Today's conference call is being recorded. I will now turn the call over to Ms. Hanyu Liu, Company Investor Relations. Please go ahead.

Hello, everyone, and welcome to HUYA's Second Quarter 2022 Earnings Conference Call. The company's financial and the operational result 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. Ashley Wu, Vice President of Finance. 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 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 this, and other risks and uncertainties is included in the company's prospectus and other public filings as filed with the U.S. Securities and Exchange Commission. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Please also note that HUYA's earnings press release and this conference call include discussions of unaudited GAAP financial information as well as unaudited non-GAAP financial measures. HUYA's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited most directly comparable GAAP measures. I will now turn the call over to our CEO, Mr. Rongjie Dong. Please go ahead.

Hello. Hello, everyone. Thank you all for joining our conference call today. Our 2022 second quarter was largely conditioned by the turbulence in the macro and regulatory environment. We mentioned in our previous earnings that the new domestic live streaming regulations which were introduced in May mainly focused on keeping behavior and protection for minors. Accordingly, we adjusted the associated products and operations on our platform. And we will continue to closely follow policy updates and make timely adjustments to ensure compliance. The prudent adjustments we undertook in Q2 create a fairly immediate impact to certain facets of our business. And together with the macro headwinds, Q2 domestic live streaming revenue increased by mid-single-digits on a quarter-over-quarter basis. Despite the impact, we still managed to grow our user base as well as achieve approximately RMB 2.3 billion in revenues and approximately RMB 6 million in non-GAAP net income in the second quarter of 2022. We will work to mitigate the effect on our business by dynamically adjusting our monetization strategies across our platforms operations. Essentially, our strong foundation and the business fundamentals will carry us through the long term. We are confident we have leverage in our business as we scale further in the game live streaming industry through consistent investments in quality content and in retail products, while continuing to provide attractive game, e-sports and the entertainment content satisfies the core needs of our users. Our business is a resilient one, which we expect to rebound and prosper as market conditions stabilize. With that in mind, we remain focused on future opportunities. In spite of all the external factors, our Q2 results marked another quarter of user expansion. We sustained growth in mobile MAUs and instituted aforementioned measures across our product upgrades and the game industry value chain integration.…

Thank you, Mr. Dong, and hello, everyone. To expand on Mr. Dong's remarks, I will now provide some updates on our content enrichment and diversification initiatives. On the professional e-sports content front, we broadcasted around 90 third-party e-sports tournaments in the second quarter of 2022 with the total viewership of those licensed tournaments reaching 608 million. During the quarter, we pursue our ROI-led strategy, procuring autonomous more selectively to ensure our high-quality content offerings aligned more closely with our budget control goals. In particular, legacy tournaments, such as LPL, Mid-Season Invitational (MSI) and King Pro League (KPL), maintained their leading positions in viewership. Thanks to our strengthened cooperation with the Crossfire game, the Crossfire Pro League spring continue to attract high user attention. I'd like to highlight that in 2022, Huya became one of Crossfire’s top-level partners. Our cooperation now spans the game viewing experience, E-sports content and virtual privilege. We expect our broader alliance with Crossfire to help further expand our market reach in the first-person shooter game genre, giving us another competitive advantage. In addition to licensed e-sport content, we broadcasted 18 self-organized e-sport tournaments and entertainment PGC shows during the second quarter, generating total viewership of approximately 100 million. This was a particularly remarkable achievement, given the pandemic-related lockdowns in a few major cities in Q2 as well as our stricter project selection process. During the quarter, outstanding self-organized channels included Honor of King from the Cup, Huya Tianming Cup, Huya division of Teamfight Tactics open championship in the seventh Huya mobile game arena. It is worth noting that the Thunder series, a phenomenal Huya IP tournament created for Honor of Kings, integrated online and offline gaming sessions promoting the influence of popular broadcasters on our platform. Such efforts are assisting Huya in building its proprietary comprehensive…

[Operator Instructions] The first question now comes from the line of Yiwen Zhang from China Renaissance.

My question is regarding the game community policy -- added recent update. So can you elaborate a bit more the rationale behind the setting of this game community? And then what kind of opportunity does it provide -- does it synergize with the rest of our business?

Thank you for this question. Recently, we have officially launched the Tiger Chit-chat community in Huya's application version 10.0, which covers video and graphic communications. Users can initiate discussions on game Q&A, strategy tips, as well as tournaments and et cetera. On the one hand, it provides a place for a communication between users and live streamers. Users can also discuss interesting content with their peers. The live streamers can better interact with their fans during non-streaming hours, which is also conducive to consolidating their fan base. And on the other hand, the recommendations and operating screening, it can stimulate the enthusiasm of the users to produce video UGC and increase the sense of user participation and help to improve the high-quality content output on our Huya platform. In addition, we also set up zones for some major game titles and tournaments and invited the official operating accounts of the games to settle in so as to provide more accurate consultation and related video and live content of the corresponding game title. At the same time, it can also help the game studios to optimize their operation for a better effect and enhance their cooperation relations with Huya. This version update comes as a natural upgrade of function of community. Huya's community has been gradually built over the past several years. And therefore, it is necessary to upgrade the product to make an organic combination of live streaming, plus video, plus community, and in a one-stop manner, meet the users' various needs for watching the game live, sharing and communicating, and joining the game at any time. The content metrics of Huya meets the needs of the players to understand and discover the game before the play, consume the derived content after the game and also precipitate the needs of the players. We hope to generate greater value in the game industry chain, explore other monetization opportunities, in addition to live revenue income, advertising and games.

For the question, our next question comes from the line of Ritchie Sun from HSBC.

Regarding the regulation titling towards tipping ranks in PK since May, could you please quantify the revenue MAU and paying user impact on our platform? And what are the alternative solutions for us to recruit the loss of revenue on users due to the regulation?

Since the regulatory authorities issued the opinions on standardizing the online live broadcast reward and minors protection in May, we have implemented the requirements on schedule after the policy change accordingly. And this policy mainly focuses on minor protection and strengthening the management during the peak hours, such as the adjustment of PK playing sessions and key functions such as the tipping ranking modification. We believe that this policy change will help us to better regulate the industry and promote long-term development. [Technical difficulty] -- to some products and operations on the platform. And meanwhile, we have also made some more stringent management on the live content and behaviors of the live streamers. We will also closely monitor the policy updates and timely improve the product and operation practices and create a more healthy platform atmosphere and content supply. At present, these adjustments have been casting some impact on live broadcast revenue that we have in a certain period of time. Amongst which, the impact in Q2 is mainly in June, and it is expected that the Q3 will reflect its impact on the whole quarter. We are also continuously assessing the subsequent impact of these adjustments on financial and operational indicators. Nevertheless, on the whole, we believe that these adjustment and changes have limited impact on the demand of the core users on Huya. We'll still serve the core users by providing high-quality games, videos as well as other entertainment content. And at the same time, we'll better optimize our strategy in operation and monetization for a balanced development of our product and subscription businesses. At the same time, we'll continue to strengthen the compliance capability of Huya and invest in corresponding technologies. For example, here, there is this AI real-time sound silencing system, which is the industry's first, launched recently. This can help us to realize real-time shading of audio transmission of potentially risky content and effectively improve our review ability of live content. The establishment of a better platform compliance system is conducive to help us in the longer-term growth in Huya.

Next questions comes from the line of Thomas Chong of Jefferies.

Thomas, are you there? How about we move to next question, please, first? Thank you.

No problem. Certainly. [Operator Instructions] We will now move to the next question first from the line of Katrina Chiu of Citi.

Can management share with us the measures we have taken for cost optimization? And how we should expect the margin outlook in second half of '22?

At present, to improve the company's operational efficiency, take more stringent budget control measures, and optimize cost and expenses are an important job of ours which will help us to better consolidate the company's businesses and financial foundations under the current environment and support the long-term sustainable development. First of all, our recent adjustment of overseas businesses is a measure of overall cost optimization, which can help us to reduce the margin jag of overseas business loss on the whole. In terms of the cost in the second quarter, in addition to more stringent screening procedures for copyrighted and self-made content, it has been optimized in terms of the live streamer signing and bandwidth utilization efficiency. In terms of operating expenses, we are more cautious in channel and promotion expenses, and we also strengthened the internal processes for that matter. We also have made more control over the personnel-related costs and expenses. Despite the decline in profit margin due to the decline in revenue in this quarter, we still made some achievements in improving the operational efficiency. The total operating expenses in the second quarter decreased by 21.6% year-over-year and 17% quarter-on-quarter. We believe that these measures will continue to optimize the cost and expenses. However, due to seasonal factors, our profit margin level will be affected by the increase of event costs and the corresponding promotion expenses in the second half of the year. For a longer-term perspective, by enhancing monetization capability of ours, we continuously optimize the cost and expense structure, such as a more balanced tournament and self-produced content and streamer costs as well as continuous improvement of operational efficiency. We're confident in improving the margin and maintaining a positive profit.

Okay. Let’s have the next question.

We will take the next questions from Thomas Chong from Jefferies.

My question is about our content strategy. Can management comment about how we should think about the outlook in second half as well as in the future?

Thank you for your question. As we mentioned before, that users are the core of our businesses, and it is the company's long-term development strategy to continuously drive user growth. And therefore, for quality content investment, it is still necessary because it help us to continuously serve our users in consolidating the competitive position that we have. At the same time, we will also adopt a more cautious investment strategy and concentrate our resources on more effective content. In terms of IP and self-made content, we carry out more targeted analysis and meticulous evaluation on the ROI of various planned purchase that we have and content production and make timely adjustment according to the market conditions. And since this year, we have more strict choices in IP terminals and self-made content projects. So the total number may not be as many as before, but the overall quality is improved. This is also reflected in the size of the viewership watching these contents and the growth of the MAU on our platform. Let me give you an example. In the second quarter, a total of about 100 million people watched 18 self-produced tournaments and PGC programs that we have. The year-on-year growth of mobile MAUs in Q1 and Q2 was at a high single-digit level. Here, I would also like to mention that at present, we'll continue to invest in some top-tier events with higher prices relatively. In the second half of the year, we'll broadcast top-level professional leagues of various mainstream game titles, including S-12. We consider not only the short-term direct cost and revenue, but also the impact on user value, brand reputation, and platform cooperation and so on. At the same time, we also hope to negotiate for better commercial terms in the future and realize long-term benefits. In terms of live streamer content, we will also dynamically address the input of signing and tipping sharing that we have with the live streamers, through the upgrading of technology, we can help and encourage the users and live streamers of the platform to create videos and more interactive content to form a more complete matrix of content offering.

The next questions comes from the line of Lei Zhang from Bank of America.

My question is mainly about our long-term growth. What are the growth driver in mid- to long-term that you can share with us?

At present, our monetization result is mainly conditioned by the external environment. HUYA has a continuously growing user base and good user loyalty and commercial operation ability. With our commercialization model be further explored and optimized and the market situation improves, we expect that our live broadcast revenue will gradually return to a growing trajectory. And we believe that starting from here, we have a few mid to long-term development directions. First, as mentioned before, HUYA, as a key part to the game industry chain, provides a lot of value for our game users and studios. For the category of long-tail game titles, more services can be provided from the operation and to help the game obtain and retain users and expand the influence of the games. At present, our direct income is mainly coming from the user side, while from the game studios side, we also hope to achieve win-win cooperation through deeper cooperation with them and more services provided such as joint operation. In the mid- to long-term, I think this is a place with the potential for our business and revenue growth. Second point, we hope to better link the video businesses with live streaming businesses, the community functions that we have now integrated into the video content, and we have also set up a vertical short-form video module. And through upgrading these products, about 30% of our daily users watch videos currently. With this data being further improved in the future, we hope to realize more monetization from the video, such as advertising revenue. In addition, we believe that interactive games in the live streaming room as well as the forms of virtual streamer or virtual live room are gaining popularity. So we have explored and tied these forms and achieved some preliminary results. And it is expected that these forms will also present some opportunities to create more value in the future.

There are no further questions. Now I would like to turn the call back over 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 by us today.

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

Thank you.