Huya Inc. (HUYA), a leading livestreaming gaming platform, has shown promising progress in its diversification strategy, but significant challenges remain. The company reported a 16% year-on-year drop in second-quarter revenue to 1.5 billion yuan ($212 million), a continuation of a trend that has seen revenue decline for over two years. However, Huya’s revenue from game-related services beyond streaming, including advertising and in-game item sales, more than doubled to 308.5 million yuan during the quarter. This represents a significant achievement in Huya’s diversification efforts, which began last August as a means to offset the slumping revenue from its main streaming business.
The company anticipates continued double-digit growth in revenue from game-related services in the current quarter compared to the April-June period, according to acting co-CEO Huang Junhong. This optimistic outlook suggests that Huya is confident in the future of this new revenue stream.
Despite this positive development, Huya faces a number of obstacles that have contributed to its revenue decline. The broader Chinese gaming sector has experienced a downturn in recent years due to Beijing’s efforts to regulate gaming time for minors. This crackdown included limits on the amount of money minors can spend on virtual gifts, a significant revenue source for platforms like Huya. Additionally, the economic headwinds currently facing China have dampened consumer enthusiasm for gaming, virtual gifts, and other digital purchases.
Huya’s business model further exacerbates the challenge, characterized by high costs that lead to strikingly low margins for a technology company. The company shares a large portion of its revenue with streamers and their agencies, and incurs substantial costs for content licensing and production. This results in thin gross profit margins in the low double-digit range, which have been declining.
However, Huya’s newer game-related services carry higher margins, potentially contributing to overall profitability improvement in the future. The demand for these services may also be less susceptible to economic fluctuations, as they involve relationships with businesses, which are generally more stable than relationships with individual consumers. These new products are also less likely to be affected by regulatory crackdowns.
Investors have responded positively to Huya’s progress in diversifying its services and its extension of a share buyback program. The company’s announcement of a substantial special cash dividend of $1.08 per American depositary share (ADS) was particularly well-received. Huya’s shares jumped 14% following the earnings release, although they later retraced their gains.
While Huya currently operates at a loss on an operating basis, the company is financially sound, with nearly double the cash and cash equivalents at the end of June compared to the previous six months. This financial strength enables Huya to be generous with shareholder returns.
Looking ahead, Huya’s success hinges on its ability to continue growing its new business while maintaining revenue from its main streaming services. Improving margins would also be essential to demonstrate that the company can achieve both revenue growth and profitability.
