Should we buy China’s Twitch?

Company Profile

HUYA Inc. (NYSE: HUYA) is the №1 game live streaming platform in China. We have the largest and most active game live streaming community in terms of average MAUs, and average daily time spent on mobile app per mobile active user in the fourth quarter of 2016 and 2017, and the largest number of active broadcasters in 2016 and 2017, according to a report by Frost & Sullivan, which was commissioned by us. As the pioneer and market leader, we are well positioned to expand further in the rapidly growing game live streaming market in China. We cooperate with e-sports event organizers, as well as major game developers and publishers, and have developed e-sports live streaming as one of the most popular content genres on our platform. Building on our success in game live streaming, we have also extended our content to other entertainment genres, such as talent shows, anime and outdoor activities.

We have created an engaged, interactive and immersive community for game enthusiasts of China’s young generation. Our rich and high-quality game live streaming content is a magnet for users who share common interests to connect and share their passion on our platform. Our users interact with one another with the support of our platform’s wide array of innovative and appealing social functions, such as bullet chatting, real-time commenting and gifting. Such real-time interactions on our platform cultivate a strong sense of belonging, which effectively increases our user stickiness and time spent.

Our open platform also functions as a marketplace for broadcasters and talent agencies to congregate and closely collaborate with us. We have set up effective operating standards and comprehensive incentive mechanisms to encourage healthy competition, good performance and regulatory compliance. The monetization opportunities for broadcasters and talent agencies are linked to their performance, which motivates them to supply high-quality content to our platform. We believe our role as an efficient and transparent marketplace fueled our continuous growth and success.

Our content is highly dynamic. Beyond the real-time nature of live streaming where each broadcaster improvises in each live streaming session, our community interactions generate another form of content. The variety of real-time interactions between viewers and broadcasters or among viewers creates viewer-generated content, which in turn becomes part of the overall entertainment and social experience offered on our platform. Such content enhances the sense of involvement and makes it more fun to watch live streaming.

Our technology platform is designed for reliability, scalability and flexibility. Leveraging our strong technological capabilities in the fields of big data and artificial intelligence, or AI, live streaming, and infrastructure, we deliver a superior user experience and conduct operations in a highly efficient manner.

2018 full-year revenue growing by 113% to over $4.6 billion RMB, driven by solid growth in both live streaming and our advertising business. As a result of our continuous revenue increase and margin expansion we were able to deliver fourth quarter positive operating and net income on GAAP basis.

Financial results for the fourth quarter. Total net revenue for the fourth quarter of 2018 increased by 103.1% to RMB 1,504.9 million from RMB $741 million in the same period of 2017. Live streaming revenues increased by 108.1% to RMB 1,441.8 million in the fourth quarter of 2018 from RMB $692.7 million in the same period of 2017, primarily due to the increase in both the number of paying users in our platform and extending per paying user.

The increase in the number of paying users was primarily driven by our mobile strategy diversification of content offerings and the continued efforts in converting active users into paying users. Advertising and other revenues increased by 30.7% to RMB 63.1 million in the fourth quarter of 2018, from RMB 48.3 million in the same period of 2017. This increase was primarily driven by increased demand from gaming advertisers and further recognition of HUYA’s brand name in China online advertising market.

Cost of revenues increased by 100.1% to RMB 1,266.3 million in the fourth quarter of 2018 from RMB 632.9 million in the same period of 2017, primarily attributable to the increase in revenue sharing fees and content costs, as well as bandwidth costs. Revenue sharing fees and content costs increased by 112.8% to RMB 1,042.1 million in the fourth quarter of 2018 from RMB 489.7 million in the same period of 2017, primarily due to the increase in virtual items revenue sharing, which was in line with the company’s live streaming revenue growth and continued spending in Esports content and content creators in both domestic and overseas markets.

Bandwidth costs increased by 42.1% to RMB 161.6 million in the fourth quarter of 2018 from RMB 113.8 million in same period of 2017, primarily due to an increase in bandwidth usage as a result of increased user base on HUYA’s platform and enhanced live streaming video quality improvements, partially offset by improved efficiency in bandwidth utilization as a result of the deployment of new technologies in content distribution.

Gross profit increased by 120.7% to RMB 238.6 million in the fourth quarter of 2018 from RMB 108.1 million in the same period of 2017. Excluding share-based compensation expenses, non-GAAP gross margin increased to 16.1% in the fourth quarter of 2018 from 14.6% in the same period of 2017 and from 15.5% in the third quarter of 2018, primarily due to our enhanced monetization efforts, technology innovation on bandwidth utilization, and a continued leverage on economies of scale.

Research and development expenses increased by 80.9% to RMB 79.1 million for the fourth quarter of 2018 from RMB 43.7 million for the fourth quarter of 2017, mainly attributable to increased headcount and wage inflation in R&D personnel and share-based compensation expenses related to the share awards newly granted in 2018.

Sales and marketing expenses increased by 102.4% to RMB 59.9 million for the fourth quarter of 2018 from RMB 29.6 million for the fourth quarter of 2017, mainly attributable to the increase of marketing and promotion expenses as a result of enhanced efforts in promoting HUYA’s brand awareness and Esports content, as well as cooperating with various marketing channels in both domestic and overseas markets.

General and administrative expenses increased by 153% to RMB 92.6 million for the fourth quarter of 2018 from RMB 36.6 million for the fourth quarter of 2017, mainly due to the increase in share-based compensation expenses related to the share awards newly granted in the first quarter of 2018, professional fees and salaries and welfare of management personnel.

Operating income was RMB 18.5 million for the fourth quarter of 2018, compared with an operating loss of RMB 1.8 million in the same period of 2017. Non-GAAP operating income, which excludes share-based compensation expenses, increased by 280.9% to RMB 82.5 million for the fourth quarter of 2018 from RMB 21.7 million in the same period of 2017.

Non-GAAP operating margin was 5.5% in the fourth quarter of 2018 compared with 4.8% in the third quarter of 2018 and at 2.9% in the fourth quarter of 2017. Net income attributable to Huya Inc was RMB 99.6 million for the fourth quarter of 2018, a 19-fold increase from RMB 5.0 million in the same period of 2017.

Non-GAAP net income attributable to Huya Inc. in the fourth quarter of 2018, which excludes loss on fair value change of investments and equity investee’s investments and share-based compensation expenses, increased by 486.8% to RMB 166.9 million, from RMB 28.4 million in the same period of 2017.

Non-GAAP net margin was 11.1% in the fourth quarter of 2018 significantly improved by 3.8% in the fourth quarter of 2017. Diluted net income per ADS was RMB 0.45 for the fourth quarter of 2018, compared with diluted net loss per ADS of RMB 0.05 for the same period of 2017. Each ADS represents one Class A ordinary share. Non-GAAP diluted net income per ADS was RMB 0.76 for the fourth quarter of 2018, compared with RMB 0.19 for the same period of 2017.

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