Douyu International Holdings Ltd (DOYU) 2021 Q2 法說會逐字稿

Good morning and good evening, ladies and gentlemen. Thank you, and welcome to DouYu International Holdings Limited Second Quarter 2021 Earnings Conference Call. (Operator Instructions) I will now turn the call over to the first speaker today, Mr. Mingming Su, Chief Strategy Officer at DouYu. Please go ahead, sir.

Thank you. Hello, everyone. Welcome to our second quarter 2021 earnings call. This is Mingming Su, DouYu's Chief Strategy Officer. Joining us today are Mr. Shaojie Chen, Chairman and Chief Executive Officer; and Mr. Hao Cao Vice President of Finance. You can refer to our second quarter 2021 financial results on our IR website at ir.douyu.com. You can also check a replay of this call when it becomes available in a few hours on our IR website.

Before we start, please note that this call may contain forward-looking statements made pursuant to the safe harbor provision for the private securities litigation reform act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievement of the company to be materially different from the results, performance or expectations implied by these forward-looking statements.

All forward-looking statements are expressly qualified in their entirety by the cautionary statement, risk factors and the details of the company's filing with the SEC. The company undertakes no duty to revise our update any forward-looking statements for selected events or [statements] after the date of this conference call.

I will now speak on behalf of our Chairman and CEO, Mr. Shaojie Chen.

During the second quarter of 2021 our, overall performance remained stable as we continued to upgrade our business system. Total net revenues for the quarter reached RMB 2.34 billion, while quarterly average paying user count reached 7.2 million. During the second quarter, our average mobile MAUs increased by 3.9% year-over-year to 60.7 million.

MAU growth was mainly driven by 2 factors: First, we attracted new eSports users and galvanized the return of older users. So another skew eSports tournament for the quarter, which includes major events such as our LPL Spring Grand final 2021. LoL mid-season invitational and KPL Spring brand final 2021. Second, we refined operations by enhancing our collaboration for hit games, including LoL and Honor of Kings.

While exploring partnership with additional game developers to introduce more mid- and long-tail games and strengthening operations for new games. For NARAKA: BLADEPOINT, a major hit game launched in the quarter. We collaborated with its game developer to develop and launch various promotional content and events starting in the testing stage. These efforts have gradually attracted a high quantity player to our platform.

Now turning to our content update. During the quarter, We continued to expand our content ecosystem, both upstream and downstream to cover the entire eSports industry value chain. We also ramped up our efforts to construct a [highly] comprehensive sales content library, focusing on various game genres. By broadcasting and self producing eSports tournaments and events in various formats, we continued to derive more high-quality eSports content. At the same time, we also continued to actively sponsor and invest in a number of top eSports teams.

During the quarter, we broadcasted over 50 large-scale eSports tournament and self-produced more than 80 high-quality eSports events. Among them, we leverage the LoL preseason Challenger match to actively cultivate new high-quality streamers and organized match between streamer and the young training team to engage the content on our platform during the off-season for premier eSports events.

In addition, the LPL summer 2021 tournament which is the highest level LoL professional tournament in China kicked off in June. We broadcast the tournament through our platform in consult with other related self-produced programs for complete live streaming coverage of the event from start to finish.

For our PLS 1 tournament, the highest-level professional league for Peacekeeper, we wrote out a series of promotional events such as live watch parties for tournament match, anchored by a popular live streamers to further improve user engagement. Meanwhile, we continued to fill up the development of our content library by introducing additional game developers to make our content library, more comprehensive and cover additional game genres.

Further, we utilized eSports tournament broadcast to further engage coverage for our blockbuster games. During the quarter, we hosted over 20 tournaments for games of various genres including LoL, Honor of Kings and Peacekeeper. Second, we utilized the IP of popular streamers to create more high-quality PGC content and meet the diverse content amount of users. Finally, we further enhanced user engagement based on their interest in high end strategy game play by delivering content related to real-time (inaudible) and advice from streamers and high-ranking professional on matching in-game inscription and equipment selection.

We also implemented systematic marketing programs for new mid- and long-tail game. This contains our multi-step projects which include the development and the delivery of promotional content and events based on individual game life cycles. We began cooperating with game developers prior to the launch of beta testing for new games to foster anticipation and excitement among target consumers.

We utilized the influence of our top streamers to increase brand awareness for this new game. Meanwhile, by recruiting new streamers for games in advance, we are able to quickly fill the gap in game content after the game's official launch. Furthermore, we actively cooperated with game developers to launch a series of events to foster development of engaging video content. Further, for the cost of this content more potential players are attracted to various gaming broadcast. Additionally, our platform generates game-related hot topics, introduces the customized programs and content to promote the game and allows the players to have interactions with key-players enabling us to attract new users and improve user beginnings.

Now turning to monetization. In the second quarter, our quarterly paying users were 7.2 million with an ARPPU of RMB 303. The slight year-over-year decrease in ARPPU was primarily due to optimally high user activity and ARPPU during the second quarter of 2020 related to stay-at-home orders from the pandemic.

During the quarter, user behavior normalized to pre-pandemic levels. Through our operating strategy and execution, we continue to focus on improvements in user engagement and paying user consumption. Going forward, we will work to further optimize our products, diversify our paying user scenarios and enhance our overall paying user experience to achieve a healthy ARPPU growth rate.

Finally, we remain committed to refining our operations across different segments, which should help to further boost the segment efficiency. We are also making good progress on the R&D front. During the quarter, we launched the AV1 decoding technology, becoming the first platform in China to support everyone decoding in live streaming. Compared with our previous decoding technology, AV1 has lower bandwidth [code] and time eliminator lag while maintaining the same video quality.

In terms of our product function innovation, our platform upgrades revolved all around the evolution in our game content. Starting from live streaming, we have expanded into produced video and the graphics content. With our popular and new game segment as a primary subject, we have forged an integrated game segment that combines live streaming, video, visual graphics, (inaudible), interactive community and in-game gift.

We have also adapted our platform with search function to support these multiple forms of content. By providing support for searching and accessing [free for all] live stream videos and visual graphic content on our platform, we can now better satisfy users' search course for specific game content.

We also continued to fortify our foothold overseas. During the quarter, we continued to increase our investment in overseas market. In particular, I would like to highlight our achievements in Japan. According to the latest APP earning statistics, Mildom is one part of the mainstream video game live streaming APP in Japan and the maintenance and industry-leading user base in the country. In terms of our future strategy, we will continue to strengthen the monetization capabilities of Mildom in order to further solidify its market position in Japan, and also expect to achieve best economics of scale in japan.

In summary, during the second quarter of 2021, we leveraged our platform advantages to achieve success on numerous fronts. We expanded our multi dimensional collaboration with more game developers. We also provided the gamers and viewers with comprehensive content offerings combining live streaming, videos, visual graphics and an interactive community.

Looking ahead, we plan to continue executing our product, streaming and content strategy to further augment our monetization capabilities and improve our overall financial performance.

With that, I will now turn the call to our Vice President of Finance, Mr. Hao Cao, to go through the details of our financial performance in the second quarter.

Thank you, Mingming. Hello, everyone.

Total net revenues in the second quarter of 2021 were RMB 2.34 billion, Live streaming revenues were RMB 2.18 billion compared with RMB 2.32 billion in the same period of 2020. Advertising and other revenues were RMB 158.7 million compared with RMB 188.3 million in the same period of 2020. The year-over-year decrease in live streaming revenues was mostly due to the abnormally high user activity and up in the prior-year period caused by the stay-at-home orders during the pandemic.

In the second quarter of this year, as the pandemic was gradually brought under control in China, user behavior had largely normalized, reverting to the pre-pandemic levels. This decline was partially offset by our efforts to improve the spending by our core paying users. The year-over-year decline in advertising and other revenues was mainly due to the fact that games advertisers increased their marketing budget in the second quarter of last year due to the pandemic and related stay-at-home measures. As a result, our overall advertising revenue in the second quarter of last year reached a relatively high level.

During the quarter as the pandemic was continuously brought under control in China and the number of hit games featured on platform was reduced, our game-related advertising revenue decreased quarterly.

Cost of revenues in the second quarter of 2021 increased by 2.3% to RMB 2.03 billion from RMB 1.99 billion in the same period of 2020. More specifically, revenue share fees and content costs increased by 3% to RMB 1.81 billion from RMB 1.75 billion in the same period of 2020. This increase was mainly due to increased investment in overseas streamers as we continue to expand overseas market, higher licensing costs due to more investment in eSports tournament broadcasting rights and additional investment in proprietary content production.

Bandwidth costs in the second quarter of 2021 decreased by 3.9% to RMB 161.8 million from RMB 168.4 million in the same period of 2020. This decrease was mainly due to the successful execution of our ongoing in-house technology upgrades, which led to higher bandwidth efficiency and lower bandwidth usage costs during the period.

Gross profit in the second quarter of 2021 was RMB 306.5 million compared with RMB 522.9 million in the same period of 2020. Gross margin in the second quarter of 2021 was 13.1% compared with 20.8% in the same period of 2020. This decrease was primarily due to the decrease in revenues, resulting in an increase in revenue [sharing fees] and common costs as a percentage of total net revenues.

Sales and marketing expenses in the second quarter of 2021 were RMB 295 million compared with RMB 142.1 million in the same period of 2020. This increase was mainly attributable to the increased costs from utilizing additional promotional channels for user acquisition and continued spending on both official and self-produced live eSports tournament and corresponding sponsorship fees as the pandemic was gradually brought under control in China.

Research and development expenses in the second quarter of 2021 were RMB 123 million, which represented an increase of 29.6% from RMB 94.9 million in the same period of 2020. This increase was primarily due to additional investments in technical personnel as we continued our overseas expansion and technology infrastructure upgrade to enhance user experience. General and administrative expenses in the second quarter of 2021 were RMB 102.6 million compared with RMB 79.5 million in the same period of 2020, primarily due to the increase in professional service fees during the quarter.

Adjusted operating loss in the second quarter of 2021, which adds back share-based compensation expenses, was RMB 165.1 million compared with an adjusted operating income of RMB 272.7 million in the same period of 2020.

Net loss in the second quarter of 2021 was RMB 181.7 million compared with a net income of RMB 319.3 million in the same period of 2020. Adjusted net loss in the second quarter of 2021, which excludes share-based compensation expenses, share of income in equity method investments, and impairment loss of investments was RMB 145.1 million compared with an adjusted net income of RMB 322.9 million in the same period of 2020.

For the second quarter of 2021, basic and diluted net loss per ADS were RMB 0.45 and RMB 0.45, respectively, while adjusted basic and diluted net loss per ADS were RMB 0.35 and RMB 0.35, respectively.

Going forward, we will continue to explore new methods of improving our monetization capability and efficiency. Additionally, as we continue to grow, we will focus on further utilizing our operating leverage to build the sustainable development of our platform.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

(Operator Instructions)

The first question comes from Lei Zhang with Bank of America Merrill Lynch.

(foreign language)

Two questions here. First is, can you give us more color on the new game that had good performance in the second quarter? And if we look at into second half, any new game that we can expect? Second related, I want to hear your opinion on the traditional eSports games. What is the trend of those games in terms of time spent for users that you can share? Also, how could we track react the trend of the hardcore eSports game in the future?

Thank you. Let me answer these 2 questions. According to our platform data, new games such as NARAKA: BLADEPOINT and [CFJ] HD, CrossFire HD have performed well since the second quarter of this year. From June to July, we observed that the overall live streaming room and the user engagement of our NARAKA: BLADEPOINT increased by more than 200%.

We have continued to generate PGC video and built our container ecosystem for this new game. Such efforts have played an important role in promoting these games and elevating our users' platform [thickening]. A bit on expected launch schedule for games in the second half of this year, we expect that new catalyst for the gaming market will include LoL mobile, Pokémon UNITE and Justice Online.

Prior to the launch of our new games, we plan to cooperate with game developers to foster anticipation and excitement among targeted consumers and to deliver sufficient and rich game-related content for gamers and users on our platform.

And second question. The majority of our top 10 platform games are from a traditional eSports in general, such as mobile and FPS, which are characterized by long life cycles and high entertainment quality. According to our platform data, our top 10 game genres have remained largely similar in the past several quarters. The data also suggests that user time spent on non-top 10 games over the past 2 quarters has gradually increased compared to the same period a year ago.

We believe the primary reason behind this trend was the strategic upgrade of our platform. In the past, as a pure B2C platform, we used to only offer game-related live streaming content to gamers and users. However, starting from this year, we have focused more on non-default games. We have tried to create a separate segment for each new game on our platform.

We are also cooperating with game developers to develop more comprehensive plans and quality content for game promotions through live streaming, video and graphic type content as well as our user community. Such as in terms of live streaming, we can leverage our top streamers to foster anticipation and excitement among targeted consumers prior to the launch of new games.

By working with game developers, we can create multiple PGC videos and increase our number of promotional channels for user communities we can invite KOLs to have real-time interaction with our users, thus generating more related hot topics and engaging content. As we continue to execute this product strategy, we expect that the time spent by users on non-eSport game segments will increase and our platform content will become more diversified in the long run. Thank you.

The next question comes from Zhangxiang with China Renaissance.

(foreign language)

The first question is regarding these produced tournament. In the prepared remarks, you mentioned there were over 80 self-produced tournaments. And we also note that this year, there was an upward trend in the pricing and the license tournaments (inaudible) of the self-produced content investment in order to tackle the increase in licensing cost trend?

And then secondly, on the new game preparation, you mentioned a few in the previous question. For example, the League of Legends mobile, how is our latest progress on the streamer recruitment? And in what way will we build up the top cohort streamers in the new game for the new game preparation?

(foreign language)

[Interpreted]

And now it will be translated.

So basically, this year, we have witnessed an increase in licensing costs for our eSports tournament broadcasting, right? Across the industry. So however, we expect the licensing costs for the broadcasting rights of major eSports tournaments to remain relatively stable over the next couple of years. And our expectation is based on our observation of current market conditions and the fact that the eSports industry has reached pretty mature stage of development.

And in addition, self-produced tournament content has been a pretty important part of our content strategy as well. and the self-produced torments such as the Golden Grand Tournament and the DnF All Stars, they both have a pretty -- produced outstanding results on our platform. And especially the Golden Grand Tournament, which has been held for around 11 seasons already and now has become one of the most important brand of the DouYu as well.

And going forward, we will definitely continue to bolster the organization of our own eSports events, and focus more on the generation of PGC content for non-eSports games. And we are pretty confident that we will be able to leverage our enormous amount of quality streamers and video creator resource to execute this strategy.

The next question comes from [Alex Poon] with Morgan Stanley.

(foreign language)

I have 2 questions. First question is regarding the revenue share and content cost trend in second quarter, including the different components, including the sign-up bonus revenue share and content procurement costs, et cetera. And how should we forecast this segment costs in the future given we have a little bit of revenue decline?

My second question is related to the PC MAU number. This time, we have not disclosed the PC MAU number. What is the reason behind this? And if we remove the duplicated users, how much -- how many PC users do we actually have?

About the first question on revenue sharing cost. We will maintain our 50 to 50 revenue split sharing policy for our platform and streamers. [Which is best] for our platform and tenancies. During proportional -- promotional periods, we also offer certain incentives to streamers and tenancies. Therefore, while the overall revenue sharing ratio may fluctuate slightly quarter-over-quarter. It will also remain stable in general.

The increase in content costs in the second quarter of 2021 was primarily associated with higher licensing costs and increased investment in self-produced programs. The increase in licensing costs was due to more investment in eSports tournament broadcasting rights across the industry starting from this year. As the tournament capacity becomes higher, we expect licensing costs in the second half of this year to increase slightly from the first half of this year. For our self-produced programs as we invest more in programs to produce PGC content to support the upgrade of the content and functions of our new businesses, we expect associated costs to continue increasing at a moderate pace throughout the second half of this year.

Let me answer your second question. First, our PC MAU have remained relatively stable within the range of 110 million to 130 million. Since our IPO in July of 2019, the quarterly fluctuations were mainly driven by such factors as our periodic collaborations with the PC game developer. In addition, the revenue contribution from live streaming on our PC portal has stabilized over the past several quarters.

In the long run, we expected our mobile portal to be the primary driver for attracting users and generating revenue. As a result, we have decided to double disclosing our PC MAU starting from this quarter. With user growth for (inaudible) blockbuster games still relatively under-penetrated, we believe there is plenty of opportunities in the mobile market. In the future, we will deepen our collaboration with non-eSports game developers to better cultivate user spending habits and create a more welcoming content ecosystem for our users. Thank you.

The next question comes from Daniel Chen with JPMorgan.

(foreign language)

I will translate myself. My first question is on the revenue side. We actually see that the second quarter revenue has declined on a year-over-year basis. Could management provide some more color on the rationale behind? And what's the paying user and ARPPU trend for the second half of this year for live streaming?

Secondly, is on cash. So currently, as of the second quarter of this year, we still have over $1 billion in terms of -- $1 billion of net cash. So how are we going to use this cash in the future?

The year-over-year decrease in revenues was mostly due to the abnormally higher lease activities and ARPPU in the prior year period caused by the stay-at-home home orders during the pandemic. In the second half of this year to further stimulate our paying users previous [learnings] to reach their consumption scenarios, we will continue to focus on monetization activities and products. Through our continuous focus on improving the engagement and consumption of our existing paying users will help to further elevate our ARPPU.

As to the cash on hand, we are focused on effectively using a strong balance of cash going forward. We will prioritize the sufficient allocation of cash to operational initiatives that drive the steady development of our game-related business. These initiatives include exploring strategic content upgrades more actively, developing new business segments and continuing to invest in new growth drivers.

For example, at the end of last year, we rolled out a strategic plan to further enrich the content on our platform. We also increased investments in non eSports game segments to attract new users. Finally, we escalated our R&D spending to further explore new monetization models, which was in line with our aim to make games a major monetization channel for our game-centric platform.

On the other hand, we will take more initiatives in the exploration of suitable investment and acquisition opportunities in our game-related segment as well as downstream and upstream the eSports value chain. Through these investments and acquisitions, we will expand the depth of our exposure to a wider range of industry segments and generate more synergies within our existing businesses.

The next question comes from Thomas Chong with Jefferies.

(foreign language)

I have a question relating to the terms of the M&A with Huya. What should we expect the cancellation of the deal to our operations? And can management comment about our business strategy as an independent platform? And the second question is relating to the competitive landscape. How should we think about the competition? Is it going to be more intense after the merger is [canceled]?

(foreign language)

[Interpreted]

Thank you for your question. So the rapid development of the domestic Internet industry over the past few years. So the authority has gradually improved the industry policy and regulation as well. So we believe that the antitrust regulations are in line with the government's goal of promoting positive and a fair competition among the [internet] industry participating. And thus, to encourage a level playing field across the industry.

Therefore, so we fully respect this regulatory decision actively cooperate with the regulatory requirement and operate in complying with the law. So you have seen an independently operated and managed company since its inception. As a result, so we don't expect the decision will -- to hit our proposed merger with Huya by SAMR which stands for the State Administration for Market Regulation of the People's Republic of China, to have a material impact on our operational and financial performance.

As an independently operated and managed company, we will make continuous effort to maintain our steady growth momentum and also expand our content ecosystem, both on upstream and downstream to cover each link of 4 industry long chain. In addition to bolstering our industry leadership in the transitional eSport live streaming industry, we will continue to fortify our operations in non-eSports segments to accelerate our growth and cultivate a game-centric content ecosystem on our platform.

The second question. So the game live streaming industry competitive landscape has not changed significantly since the second quarter of 2021 since the streamers were barred from moving between the platforms, competition and the industry has remained pretty healthy. So on top of this, our premium top and mid-tier also the long tile streamer resource have helped us to create a strong competitive advantage in terms of both content and number of premium streamers.

So therefore, enabling us to continuously maintain our industry leadership. So we have increased our focus on leveraging our unique competitive advantage to create more game-centric content and also build ease for content community to attract new users. In addition to our continued effort in actively cooperating with transitional eSports game developers, we have let no stone unturned in expanding our collaboration with other games developers.

In our non-Esports segment, we have not only covered the entire industry value chains, but also reinforce our leading position as a game-centric and community based platform in China. So this achievement is primarily attributable to our execution of operation initiatives based on the unique feature of non-eSports, such as user performances for graphic tests and video content. Our initiatives include encouraging live streaming video and community function integration.

So strengthening our operations for the full life circle games, enhancing platform interactions between users and content creator and also creating a high-quality proprietary content.

The next question comes from Ritchie Sun with HSBC.

(foreign language)

I will translate it myself. The first one is the sales and marketing expense was growing very rapidly in the second quarter. Why is that? And what are the major traffic acquisition channels for us? And how would the traffic acquisition cause a trend in the future? Second question is on, can you share our expansion progress in the Japanese market in more detail? And when will the monetization kick in?

Sales and marketing expenses include staff salaries, the channel promotion costs, eSports teams, sponsorship fees and expenses for online and off-line activities. In the second quarter of 2021, the increase in sales and marketing expenses was primarily due to our promotional activities with new product functions and increased marketing budget to attract new users, which was in line with the development of our new business.

Our primary promotional channels for user acquisition are through those advertising agencies associated with pension and (inaudible). We also leveraged other newsfeed platforms and content libraries as additional user acquisition channels. And we are quite positive about development of the eSports industry in the long run, and we will continue to increase our investments in eSports-related activities and eSports team sponsorships going forward.

Meanwhile, we will upgrade our product features to improve efficiency of our traffic conversion. We intend to continue enhancing our channel promotions. Therefore, in the future, we expect our sales and marketing expenses to remain at a relatively high level.

Let me answer your second question.

During the second quarter of 2021, we continued to invest and explore the Japanese market. For our Japanese live streaming platform, Mildom, we were able to maintain its market-leading position in product functionality and content [channel] diversity. Driven by its high quality content offering, Mildom continued to quickly attract new users. According to the latest APP statistic, Mildom is one of the main stream video game live streaming APPs in Japan and maintains an industry-leading user base in the country.

In terms of future strategy, we will continue to strengthen our monetization capabilities of Mildom in order to further solidate by its leading position in Japan, and also expect to achieve better economies of scale in Japan.

No more questions, okay. Thank you again for joining us today. If you have any further questions, please feel free to contact us or request through our IR website. Thank you. Have a good day.

The conference in now concluded. Thank you for attending today's presentation. You may now disconnect.