- DouYu’s revenues fell by around 22% in the second quarter, but the company broke a six-season losing streak with an adjusted net profit of 23.50 million yuan
- Huya’s revenue tumbled 23% in the same period, and it barely eked out an adjusted net profit after slashing costs
By Ken Lo
China’s gaming platforms, once locked in a fierce battle for dominance in a booming market, are now competing in the cost-cutting stakes as tighter regulation puts a dampener on the livestreaming industry.
Two gaming giants feeling the heat are long-time rivals DouYu International Holdings Ltd. DOYU and Huya Inc. HUYA. Both are backed by internet titan Tencent (700.HK) and together the two platforms control more than 70% of China’s livestream gaming market.
The companies are now in the fight of their life, with business nosediving after the Chinese government tightened its oversight of the online gaming industry, introducing strict curbs on spending by young players. Neither platform escaped the wave of layoffs that swept the livestream gaming industry early this year. The word on the street is that both shed up to 30% of their staff. After dismal first-quarter earnings, both livestreaming platforms decided they needed to get to work on cutting costs.
We warned readers of the gloomy prospects for the companies in the second quarter in a previous article, but there might be a glimmer of light for investors as all the cost-controlling efforts start to show up in the firms’ earnings statements.
It’s definitely game on in the fight to restore financial stability. The rivals’ second-quarter results merit a closer look to assess how their cost-control strategies are playing out.
Overall, DouYu’s total revenues fell by around 22% in the second quarter while Huya’s revenues tumbled 23%, with both livestreaming and advertising sales tumbling.
DouYu’s streaming revenue fell by nearly 19% from the year-earlier quarter to 1.77 billion yuan ($258 million), accounting for more than 96% of its total revenue. Huya’s streaming revenue dropped by just over 20% to 2.05 billion yuan, more than 90% of total revenue.
Huya attributed the fall to lower average spending by its paying users, whose gaming activity has been dampened by the economic and regulatory environment. Advertising revenues also fell sharply, by 59% at DouYu and 42% at Huya, which the companies blamed on challenging economic conditions in China that are curbing demand for advertising services.
DouYu slashes costs by a quarter
Obviously, the gaming business is slowing down after a stellar expansion, with the superstar companies that used to compete in investing for high-quality returns now vying for the cost-cutting crown.
DouYu has nudged ahead, cutting its operational costs by nearly 25% to 1.52 billion yuan to turn back the recent tide of red ink. It ended six consecutive seasons of non-GAAP adjusted net losses in the second quarter to log an adjusted net profit of 23.50 million yuan. Before adjustment, the company made a net loss of 38.80 million yuan, substantially better than the first-quarter loss of 86.90 million yuan, and the company is determined to land definitively back in the black soon.
Over at Huya, an adjusted net profit of 5.9 million yuan in the second quarter was much narrower than the 250 million yuan profit posted in the year-earlier period, but the company did at least manage to avoid red ink on this metric. Huya brought down overall costs by nearly 14% to 2.04 billion yuan, not quite as impressive as DouYu in the spending control stakes. So, if it wants profits to resume their earlier climb, Huya would need to double down on cost-cutting.
The good news is that both companies now have stable user bases. In the second quarter DouYu’s mobile monthly active users (MAU) stood at 55.70 million and paying users numbered 6.6 million, compared with 55.10 million and 6.4 million in the first quarter. At Huya, paying users of streaming services came in at around 5.6 million, on par with the level last year. Both of their core businesses are still robust and could sustain stable overall operational revenues.
Huya’s CEO, Dong Rongjie, was upbeat about the company’s fundamentals, after its mobile monthly active users increased by 7.7% to 83.60 million during the second quarter from the year-earlier period.
He said changes in the broader market would affect the company’s capacity to monetize its user base in the short term. But he added that the company would continue to follow policy changes closely and adjust its products as well as operations to ensure compliance while meeting users’ essential needs.
Still grappling with policy risk
Despite their better finances, the companies are still beset by external risks. In May, several Chinese government ministries jointly published plans for tighter oversight to curb what they considered excesses in the industry, with a focus on the practice of players tipping their livestreaming hosts.
Platforms have been prohibited from showing tipping rankings. In addition, access to the tipping function is restricted in the evening from 8 pm to 10 pm, when minors and other young people have time to watch streaming services. The curbs will inevitably eat into platform revenues.
DouYu and Huya were also thwarted in an attempt to join forces to avoid vicious competition, not least because both have Tencent as their leading investor. A preliminary merger agreement between the two livestreaming firms, brokered by Tencent in 2020, was vetoed last year by Chinese regulators, who have been pursuing an anti-monopoly agenda.
Their stocks have been in free fall since then. DouYu and Huya closed at $1.23 and $3.06 on Monday, both losing more than 90% of valuations reached early last year. Currently, DouYu’s price-to-sales (P/S) ratio is 0.31 times, lower than Huya’s 0.48 times. Given the swift action to shore up its finances, DouYu looks likely to close the valuation gap with Huya before too long.
© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.