Douyu International Holdings Ltd (DOYU) 2022 Q3 法說會逐字稿

Good morning, and good evening, ladies and gentlemen. Thank you, and welcome to DouYu International Holdings Limited Third Quarter 2022 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded.

I will now turn the call over to the first speaker today, Ms. Lingling Kong, IR Director at DouYu. Please go ahead, ma'am.

Thank you. Hello, everyone. Welcome to our third quarter 2022 earnings call. Joining us today are Mr. Shaojie Chen, Chairman and Chief Executive Officer; Mr. Mingming Su, Chief Strategy Officer; and Mr. Hao Cao, Vice President of Finance. You can refer to our third quarter 2022 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 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 achievements 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 details of the company's filings with the SEC. The company undertakes no duty to revise or update any forward-looking statements for selected events or circumstances after the date of this conference call.

During the third quarter, we continued to innovate game content and optimize our operational model. We both retain our current user base and attracting new users by developing high-quality content, while optimizing each game segment's rate of return by enhancing existing value-added services and launching new ones.

We achieved a second consecutive quarter of profitability on an adjusted basis as we stabilize our revenue, improving revenue quality while augmenting our cost controls and optimizing expenses. This quarter, our MAU numbered 57.1 million and total revenues were RMB 1.8 billion. Our quarter paying user count was 5.6 million and adjusted net profit reached RMB 25.7 million.

This quarter, our mobile average mobile MAUs was 57.1 million, a decline of 7.7% year-over-year, but a 2.5% increase quarter-over-quarter. Our steady growth in MAUs for 2 consecutive quarters demonstrate that the negative impact of our selective corporate procurement strategy has been absorbed.

Looking back on the third quarter, the changes in MAUs was driven by 2 factors. First, the execution of our selective corporate procurement strategy led to a year-over-year traffic loss from users who prominently view eSports tournaments on our platform. This led to a decline in MAU beginning in the fourth quarter of this year.

However, we were able to stabilize traffic by increasing our investment in self-produced content and the combination of high-quality tournament-related content and streamer content on our platform has helped us retain existing users and attract new ones. For instance, the launched in September of our top streamer tournament in the League of Legends gaming segment was a showcase event for our users and demonstrated the potential of investing in self-produced content.

Second, we continue to innovate our membership services, emphasizing their value as an avenue for exploring monetization opportunities outside of virtual gifting. Together with a series of promotional activities, these initiatives partially offset the negative impact of the MAU decline caused by our shift in content procurement policies.

We have been upgrading our platform-wide membership service, and this past quarter introduced a game-specific memberships as well. By integrating game features and gamers' needs into a viable service package, our membership services attract new traffic and motivated inactive users to revisit our platform.

Turning to our content update. In the third quarter show us further augment of wide of content offerings, including integrated livestreaming, video graphic content and community discussions. We brought together popular streamers, game developers and distributors to organize customer tournament and shows based on the unique features of individual games.

This content offered opportunities for enhanced interaction between users and streamers, and we see this and other initiatives as part of our long-term growth strategy to create a comprehensive game-centric content ecosystem. We endeavor to create a vibrant and healthy gaming community for our users by consistently providing high-quality content and innovative product offerings.

Based on huge user base of games and eSports as well as their diverse content needs, we further enriched our content offerings and produced almost 90 eSports tournaments this quarter. Joining upon our experience in organizing professional tournaments we integrated features typical of 4 events into our offerings, leveraging our competition mechanism and inviting official commentators to host the event.

We provided our users with a genuine tournament experience, featuring games, including Honor of Kings and CS GO. As the engagement of growth and winning in the gaming community increases, we also produced a series of tournaments exclusive to female users. This tournament features a game's CS GO, CrossFire and NARAKA: BLADEPOINT. And combined with our steamer recruitment and training system provided our female users with increased exposure and opportunities. Overall, these tournaments both expanded our user base and increased engagement levels in the respective game segment.

We also put in the effort to add entertainment value to our professional competitive gaming content, making it more accessible to a wider audience. For instance, we held tournaments in the LOL gaming segment in partnership with top streamers.

Serving as team anchors these top streamers invited professional eSports players and other skilled gamers to team up and compete in livestreaming sessions, which garnered well spread acclaim and attention. This type of content featuring pro-gamers in entertainment-oriented team play enhances community resonance and engagement in its gaming segment, attracting new users and reengaging in active users.

Let's now turn to copyrighted content. During our years of experience in livestreaming official tournaments we launched diversified promotional activities across a variety of content formats. These formats include livestreaming videos and graphics related to official game and tournament IP content.

At the same time, we export new models for core operating wave game developers, so as to enhance tournaments user stickiness and user engagement. For instance, during the KPL summer tournament, we collaborated with Honor of Kings' game developers to provide membership services exclusively for KPL tournament viewers, leveraging the partial game data sharing partnership we established in the previous quarter.

Incorporating the game feature of KPL, this service was well received and contributed to new user growth. In addition to these innovations, we continue to improve ROI for copyright content. Thanks to our initiatives to manage operating costs, such as by utilizing game developer resources and conducting joint operations.

Now turning to monetization. Our total paying user count in the third quarter was 5.6 million with an average quarterly ARPU of RMB 319. As we maintained our efforts to promote rational consumption we dynamically modified and fine-tuned our platform's taping functions and operations, including canceling low ROI promotional activities for new paying users.

As a result of these changes, our paying user count declined. However, our overall revenue remained stable on a quarterly basis, demonstrating the high stickiness of our co-paying users with more rational and sustainable spending behaviors.

More importantly, starting in the second quarter, we made structural adjustments to improve our revenue quality. We enhanced the quality of virtual gifting revenue and made progress in improving our non-virtual gifting revenue.

First, we have been updating our platform-wide membership services since its major upgrade at the beginning of this year. During the quarter, we upgraded our member privilege system where members are entitled to actual benefit upon the completion of certain activities on the platform and can enjoy the membership display in streamers livestreaming channels.

The service further enhances the interactive experience between streamers and platform members. We have seen encouraging improvements in our membership fee renewal rate with the high user stickiness of our loyal fans, demonstrating the value-added by the service. At the same time, we further export the potential of new monetization models and achieved meaningful progress in the development of collaborations with game developers.

During the quarter, we began launching our innovative game-specific membership service. Users who purchased game-specific memberships on our platform received basis points, and then they can earn extra points by completing assign tasks on our platform. Users can exchange accumulated points for in-game items or rewards provided by our platform in select livestreaming channels.

These promotional activities, which are based on games unique features for few gamers' demand, while enhancing user stickiness to our platform, reflecting the value of DouYu as a game-centric ecosystem platform. Going forward, we will continue to further explore the need of users based on different game features and closely collaborate with game developers to discover and expand commercialization models and opportunities.

In terms of product innovation and development, we continued to improve our users' willing experience and foster a game-centric community. During the quarter, we collaborated with Tencent Cloud to create a AR stadium where users can watch eSports tournaments.

Upon entering the AR stadium through our platform tournament, livestreaming channel, users can enjoy a wide of interactive features. Including willing games in regular and VR mode, the ability to cheer for and support the participating team and special effect gifting. We implemented this feature during the livestream of CS GO LPL and users showed great enthusiasm in participating.

We will continue to refine and upgrade our virtual game viewing experience, further enhancing our users' livestreaming experience and creating new and unique forms of engagement within our user community.

Overall, we continue to execute our sustainable development strategy by investing in self-produced content and further innovating our operations. We also remained our deep collaborations with game developers and our commitment to build a healthy and engaging game-centric ecosystem, supported by interactive content offerings.

The combination of these efforts will ensure the stable development of our traditional business. At the same time, we remain committed to improving our financial performance by actively exploring new monetization models to improve our revenue structure while maintaining the stability of our current revenue streams.

We will continue to improve our overall operating efficiency through cost controls and expense optimization, realizing our platform's potential for long-term sustainable growth.

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

Thank you, Lingling. Hello, everyone. In the third quarter, we maintained the stable financial performance of our core livestreaming business while continuing to execute effective cost and expense controls. As a result, we generated an adjusted net profit for the second consecutive quarter.

On top of this, we have been investing in new forms of premium content and exploring new monetization channels. We believe that our healthy financial status will enable us to write out the changing market environment with more flexibility in our operations.

Let's now look at our financial performance in more detail. Total net revenues in the third quarter of 2022 decreased by 23.4% year-over-year to RMB 1.8 billion. Livestreaming revenues were RMB 1.71 billion, a decrease of 22.9% from RMB 2.21 billion in the same period of 2021.

The decrease was due to the continued implementation of prudent operating strategies, such as adjustments to certain interactive features and related efforts prioritizing the healthy long-term development of our platform.

As we see a more balanced revenue structure, we focus on maintaining our core paying user base. In doing so, we intentionally canceled some promotional campaigns for new paying users starting this quarter as this provided a low ROI.

As a result of the decreased number of paying users, our quality ARPU was RMB 319, a 3.9% increase from RMB 307 in the same period last year.

Advertising and other revenues were RMB 93.3 million compared with RMB 137.5 million in the same period of 2021. The year-over-year decrease was primarily attributable to the continued exploration of new commercialization models, which use a portion of advertising traffic that could otherwise have been directly monetized as well as the soft demand for brand advertising under the weak macro economy. The decrease was partially offset by the increase in other revenues contributed by game-specific membership services.

Cost of revenues in the third quarter of 2022 was RMB 1.55 billion, a decrease of 25.2% compared with RMB 2.07 billion in the same period of 2021. Revenue sharing fees and content costs decreased 28.3% to RMB 1.32 billion from RMB 1.84 billion in the same period of 2021, which was driven by 2 factors: first, the decrease in revenue sharing fees outpaced the decrease in livestreaming revenues as a result of lower revenue sharing ratio. This demonstrated our ongoing improvements to efficiency as we continue to execute our prudent operating strategies.

Second, copyright costs decreased significantly as a result of our selective copyright procurement strategy, whereby we see acquiring overpriced copyrighted content for eSports tournaments.

Bandwidth costs in the third quarter of 2022 decreased by 17.4% to RMB 135 million from RMB 163.4 million in the same period of 2021. The decrease was mainly due to higher bandwidth efficiency achieved through dynamic bandwidth allocation. Meanwhile, the year-over-year reduction in peak bandwidth usage also contributed to the decrease in bandwidth costs.

Gross profit in the third quarter of 2022 was RMB 251.2 million compared with RMB 278.5 million in the same period of 2021. Gross margin for the quarter expanded to 14% from 11.9% in the third quarter of 2021, primarily due to 2 factors. The first was the significant decrease in the copyright costs as a percentage of revenues as we ceased acquiring of priced copyrighted content for eSports tournaments.

The second was a lower revenue share ratio, which benefited from the improvement in revenue quality and our sustainable operating strategy.

Sales and marketing expenses in the third quarter of 2022 were RMB 162.1 million, a significant decrease of 25.9% from RMB 218.9 million in the same period of 2021. This was mainly attributable to the decreases in both marketing expenses for user acquisition and branding expenses.

Research and development expenses in the third quarter of 2022 were RMB 84.4 million, representing a 31.5% decrease from RMB 123.2 million in the same period of 2021. This decrease was primarily due to a decrease in personnel-related expenses.

General and administrative expenses in the third quarter of 2022 were RMB 52.3 million, dropping by 39.5% from RMB 86.5 million in the same period of 2021. The decrease was primarily due to decreased share-based compensation expenses as a vast majority of shares and our share incentive plans were fully vested as well as decreased professional service fees.

Adjusted operating loss in the third quarter of 2022, which adds back share-based compensation expenses, was RMB 8.4 million compared with adjusted loss from operations of RMB 91 million in the same period 21.

Net loss in the third quarter of 2022 was RMB 6.6 million compared with RMB 143.5 million in the same period of 2021. The improved gross margin and expense control combined have led to 3 consecutive quarters of narrowing losses.

Adjusted net income in the third quarter of 2022, which excludes share-based compensation expenses, share of loss in equity method investments, and impairment loss of investments was RMB 25.7 million compared with adjusted net loss of RMB 72.7 million in the same period of 2021.

For the third quarter of 2022, basic and diluted net loss per ADS were RMB 0.01 and RMB 0.01, respectively, while adjusted basic and diluted net income per ADS were RMB 0.09 and RMB 0.09, respectively.

As of September 30, 2022, the company had cash and cash equivalents, restricted cash, short-term and long-term bank deposits of RMB 6.87 billion compared with RMB 6.64 billion as of December 31, 2021.

Going forward, we will continue to focus on optimizing costs and improving revenue quality in order to deliver sustainable profitability. We will continue to improve our ROIs and enhance monetization capabilities to support the long-term development of our platform.

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

(Operator Instructions) And our first question will come from Lei Zhang of Bank of America.

(foreign language) My first question is strategically. We noticed that we made some business adjustments and changed our content plan this year, which led to market improvement. So can you share with us your current strategic focus and our business plan for the next year?

Secondly, notice that we have a Q-on-Q improvement impacted 2 quarters in mobile MAU, what are the drivers for that? And how should we look at our MAU trend going forward?

(foreign language)

[Interpreted] Since updating our strategy 2 years ago, we have consistently executed towards the development of a game-centric comprehensive content system. As we have communicated in the past earnings calls, this includes building an integrated content system, refining our operations and innovating services while cultivating a healthy positive game-focused content ecosystem.

In the light of current economic complexities, we have adjusted our short-term operational focus. Internet companies has been operating in an ever-changing and highly complex external environment since last year. As such, we have adopted a more sustainable operating strategy, proactively seized acquiring overpriced copyrighted content and optimize our cost structure to ensure operational and financial stability for our business.

(foreign language)

[Interpreted] So far, this adjustment has delivered positive results. We grew our mobile MAUs for 2 consecutive quarters through continued investment in self-produced content and innovative services without relying on traffic from overpriced to premium tournaments.

We also managed to achieve positive adjusted net income for 2 consecutive quarters by streamlining our operations, improving revenue quality and implementing strident cost controls.

(foreign language)

[Interpreted] We also refined our internal management practices. We adjusted our allocation of resources by dynamically evaluating and altering our operating strategies based on the ROI of each game. In the Peacekeeper segment, for example, our decision now to purchase the copyright of the Peacekeeper Elite League spring tournament early this year was based on the relative low ROI performance of this segment.

As we refine our operations and deepen our cooperation with game developers, ROI improved, and we concluded that the timing was right to purchase the corporate of the Peacekeeper Elite League summer tournament. This allows us to regain the traffic from the tournament content while maintaining our operational prudence.

(foreign language)

[Interpreted] We have a deep understanding of the gaming industry, use of operating experience and leading streamer resources. Leveraging these advantages, we will continue to develop and strengthen our collaborations with game developers and invest in more in game-centric self-produced content, operating activities as well as community building. At the same time, we will remain our advantages in high-quality content and game operations and stabilized platform traffic by promoting our healthy and positive game ecosystem.

Going forward, we will continue to explore new business models, gradually improve revenue quality and boost operating efficiency through effective cost controls and expense optimization. By doing so, we will realize our platform potential for long-term and sustainable growth.

(foreign language)

[Interpreted] As we have communicated before, DouYu is a game-centric platform, which attracts and retains users by providing high-quality games centric content. When we introduced our selective copyright procurement strategy, we expected to lose some users. The lack of some overpriced copyrighted tournament means that users who primarily use our platform towards official tournaments will have less incentive to engage.

Recognizing this, we implemented several strategies to stabilize traffic and maintain our overall MAUs fostering the creation of high-quality self-produced content and innovating our operational strategy. This included increasing our investment in self-produced content and deepening our collaborations and operations with game developers.

We expanded our content offerings based on the analysis of streamers and of user demand in order to meet the diverse content consumption needs of our users.

In terms of, we further emphasized our collaboration with game developers and deliver our users the cans of content services wish to see and pay for. We achieved this by conducting joint operations with developers, sharing game data in compliance with laws and regulations and designing innovative strategies for commercialization. As a result, our user count has grown steadily for 2 consecutive quarters.

(foreign language)

[Interpreted] Let's take a closer look at typical gaming segment. In the LoL segment, we lost some users who mainly watched official tournaments on our platform as we did not purchase the copyright of LPL. However, the traffic of non-copyrighted content has remained stable and user interactions improved sequentially. This was driven by the quality of our premium self-produced content as well as innovative operations.

In certain gaming segments, we introduced new game-specific membership services based on each game's features and our users' needs. These measures not only attracting new users, but also drove the recovery of those segments traffic and greatly improved user engagement.

(foreign language)

[Interpreted] Following 3 quarters of operational adjustments, we have built a healthy and interactive community on our platform and have stabilized our user base, thanks to our premium streamer resources and self-produced content.

Going forward, we will continue to enhance the engagement of our core users, attract more users and cultivate our gaming-centric ecosystem. Nevertheless, we cannot ignore the impact of large-scale tournaments on traffic. In the fourth quarter, we will try our best to keep all our traffic stable without the copyright of the LoL World Championship. Thank you.

Operator, next question, please.

The next question comes from Thomas Chong of Jefferies.

(foreign language) Just now, management talks about content and operations are crucial in maintaining traffic, which is a very key reason for the stability in terms of the traffic sources. I just want to get some more color from the management perspective in terms of the progress and our plans in content and operations side.

Thank you for your question. Our gaming content is generated from pretty much content -- and our collaboration with game developers, which is gradually developed quality based on user feedback.

As our high-quality continue to attract more users, most streamers are joined to our platform and therefore continued. High quality content is the core of our operations. As such, we continue to our gaming content to meet the evolving demand of users and to create a healthy game ecosystem through high-quality content and operational refinement.

On top of having livestreaming form of content we have added video and the community focus content to diversify and enrich our market content. We have also and refined the operation of our existing gaming content to stabilize our core user base. At the same time, we extended our game general coverage in users and expand our overall user base.

We continue to improve the quality of our self-produced content and keep investing in professional tournament and For classic games, such as Honor of Kings and LoL Teamsense tactics, we successfully launched the self-produced professional tournament. We were supported and acknowledged by each game endeavors and were well received by hard core gamers.

Meanwhile, we continued our efforts producing a major tournament our content and production initiatives this quarter were concentrated on the enhancement of interactions between streamers and users.

Based on precise content of recommendation, we provided users with continued and users were more effectively directed to continue and enjoy. This improved the user and result in increased user.

Based on the strong performance of our top streamer tournament in LoL gaming segment, we subsequently produced similar content in Honor of Kings segment in October. And also we see with great from our users.

In terms of operations, we continue to deepen our collaboration with gaming developers. This collaboration has evolved from a simple game launch promotions and basic collaboration into where we work with developers throughout the entire game operation cycle.

We assist developers by supplying content and planning events, and we have now begun to explore commercialization opportunities in to share partial gaming data in complies with regulation. Providing a better viewing experience for our users, this was a crucial step in the development of our in-depth collaboration transit.

Leveraging, we launched a membership service in other opportunity segments to enrich the value-added service on our platform. Besides on other game segment, we also launched the game membership in other suitable gaming segments based on both games unique centers and user demand by providing value-added services other than gaming content we further enhance our users to our platform.

Going forward, we are dedicated to creating a more interactive game ecosystem on top of our existing content system. Our goal is to provide users with the best experience on our platform in regards to gaming content, gaming experience and gaming demand. Thank you. Please, next question.

The next question comes from Yiqun Chen of BOCI.

(foreign language) I will translate myself. My question is regarding the quarterly paying users. We noticed that this quarter experienced a quarter-over-quarter decline. Could management share more color on the underlying reasons? And can management comment on the paying user trends going forward and main contributors?

As we briefly explained in our prepared remarks, the change in paying user count was due to our decision to cancel low ROI promotion activities for new paying users. This decision was consistent with our operating strategy of lowering costs and increasing operating efficiency.

Based on analysis, the ROI of our promotional activities for new users tends to be one-off promotion activities that don't have follow up ongoing streamer and user attractions are less effective at converting new paying users into regular paying users. As such, we started to better manage our paying user groups in order to improve revenue quality. We have gradually reduced our high promotional activities and started to focus on improving the overall quality of paying users.

We are developing and improving our revenue streams in 2 ways. First, we focus on maintaining core paying users to stabilize our core business. For example, streamers fan have always been a high-quality paying user base in addition to utilizing our effectively commercialized platform-wide membership and game-specific memberships. We also launched the non-monetized feature. This is a space where fans record growth pace along with streamers.

Activities in the future were designed to be complete -- to be completed of a long period of regular participation, promoting frequent fans streamers interactions and gradually cultivating paying habits among clients.

Second, we are focused on developing new business model other than the traditional taping business model. We upgraded our platform-wide membership service to provide by added services based on streamers characteristics and games unique features. The service is developing well and has already improved our revenue mix.

We also work to identify further opportunities for monetization and launched game-specific memberships across several gaming segments. Looking ahead, we will continue to leverage our competitive advantage of our in-depth gaming-centric ecosystem to explore the potential of new and innovative business models. Thank you very much.

The next question comes from Richie Sun of HSBC.

(foreign language) Could you elaborate more on the platform wide as well as game-specific membership services? What is our progress on that? And can you talk about the monetization potential in the future?

Let me answer your question. As our membership service determined other components of our model, we are actively generating this membership to suit different user needs. Examples include our implementation of our platform-wide membership and the game-specific membership service.

In line with our refined operating strategy, we plan to launch customized membership services based on user needs within different segments. Platform-wise membership is an important tool to maintain interactions between our streamers and users. With a monthly subscription, members have more opportunities to interact with streamers in games and gain substantial access to value-added service. This increased engagement between members and steamers has led to an increase in virtual gifting revenue.

We kept enhancing the interaction better and upgraded the member this quarter, leading to a significant decrease in renewal risk and high to our platform.

As a way to experiment with new monetization, we also launched game-specific membership based on the specific matter on in-game items and game. We are currently rolling out this service among top streamers in certain gaming segments and have achieved good results through promotion so far.

Streamers service gained greater explorer and where channel traffic increased by Our significant number of game plans were attracted to participate in the new memberships. This strategy allowed us to both protect new users and galvanize and retain our inactive users, promoting a virtual secure content existing in the gaming segment.

Going forward, we will continue to explore commercialization opportunities based on game and launch more game-specific membership service in most gaming segments. By exploring gamer in-game demand, we can provide our users with an interesting experience to supplement their existing on our platform. And at the same time, this new initiative also offer more diversified revenue channels to our streamer and further promote our platform of gaming content ecosystem. Thank you. Please, next question.

The next question comes from [Kathy Tang] of Morgan Stanley.

(foreign language) I will translate myself. Could you help us to understand a bit more about the drivers behind GP margin fluctuation in the third quarter this year? Also how should we think about the future of GP margin trend?

Thank you for the question. The slight quarter-over-quarter increase in cost of revenues was mainly due to 3 factors. First, we managed to stabilize revenue share ratio sequentially, thanks to our adoption of our long-term and steady development strategy for virtual gifting business. We also reduced those revenue streams with lower ROI while improving our revenue quality.

We expect that our overall revenue change ratio will remain at the current healthy level with only slight fluctuation between quarters as we further adjust and finding our revenue-generating operations.

Second, our content costs increased sequentially during the quarter. This was mainly due to increases in copyright and self-produced content costs, which were partially offset by a reduction in streamer payroll. In terms of copyright costs, we purchased a copyright of Peacekeeper PL, resulting in a slight increase in copyright costs compared to the previous quarter.

Our self-produced content front, we continue to explore innovative content formats. During the quarter, we launched content updates for new versions of games and promoted our platform new initiatives, leading to a sequential increase in content costs.

We have also been continuously optimizing our streamer resources of overseas business leading to a quarter-over-quarter decrease in streamer payroll. Looking forward, we will prudently evaluate our procurement decisions for large-scale tournaments and optimize our streamer payroll structure. At the same time, we will continue to increase our investment in high-quality self-produced content.

In summary, we expect our gross margin for 2022 to improve slightly on a year-over-year basis. Thank you.

That is all the time we have for questions. I will now turn the call back over to management for closing remarks.

On behalf of the management team, thank you for joining our call. We look forward to speaking with everyone next quarter.

That concludes the call today. Thank you, everyone, for attending, and you may now disconnect.