Sound Group Inc (SOGP) 2019 Q4 法說會逐字稿

Hello, ladies and gentlemen. Thank you for standing by for Lizhi Incorporated's Fourth Quarter and Full Year 2019 Earnings conference call.

(Operator Instructions) Today's conference call is being recorded.

I would now turn the call over to Ms. Catherine Chen, CFO of the company. Please go ahead.

Thank you very much. Hello everyone and welcome to Lizhi's fourth quarter and fiscal year 2019 earnings conference call. The company's financial and operating results were released by Newswire services earlier today and available online.

Participants on today's call will include our founder and CEO, Mr. Marco Lai; and our CFO, Ms. Catherine Chen. Mr. Lai will start the call by providing an overview of the company and performance highlights of the quarter. Ms. Catherine will then provide details on the company's operating and financial results before opening the call for your questions.

As a reminder, this conference is being recorded. In addition, an earning highlights presentation and a webcast replay of this conference call will be available on the IR section of our website at ir.lizhi.fm.

Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements typically contain words such as "may," "will," "expect," "target," "estimate," "intend," "believe," "potential," "continue," or other similar expressions. Forward-looking statements involve inherent risks and uncertainties. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, many of which factors are beyond the Company's control. The Company, its affiliates, advisors, representatives and underwriters do not undertake any obligation to update this forward-looking information, except as required under the applicable law.

Please note that Lizhi's earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. Lizhi's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures.

I would now turn the call over to our founder and CEO, Mr. Marco Lai. Please go ahead.

Hello, everyone. (interpreted) Thank you for joining us for our fourth quarter and fiscal 2019 earnings conference call today.

First, I want thank and welcome our new shareholders who supported us in our successful listing in January on the Nasdaq Global Market. Today marks another milestone for Lizhi as we are reporting our first quarterly earnings as a public company. We are pleased to cap off 2019 with solid financial and operating results for the fourth quarter.

Our mission is to enable everyone to showcase vocal talent as we bring people closer together through voice. We genuinely believe in the power of the human voice and consider voice as a medium that creates and evokes more emotional resonance than any other media. In that spirit and riding the mobile technology wave, six years ago we launched Lizhi app aiming to transform audio creation and sharing it to elevate the role of voices in people's lives.

Today, we are proud to grow to a leading online UGC audio community and interactive audio entertainment platform in China. Building on our cutting-edge audio technology and AI-enabled infrastructure, Lizhi has cultivated an immense and highly engaged community which is home to approximately 51.9 million monthly active users and 5.9 million monthly active content creators as at the end of 2019. This is supported by our massive and unparalleled user-generated content library spanning a wide range of interactive audio products, including podcasts, live streaming and various interactive features.

On our platform, underpinning by our AI technology and leading voice engineering technology, a series of simple and intuitive mobile-based audio recording and editing tools make professional audio creation accessible for every user at anywhere. Our diverse monetization ability and strategic focus on interactive audio entertainment- positions us well in the market.

We are committed to further incentivizing content creators by lowering the threshold of content creation, and unleashing productivity of audio content, as well as unlocking greater monetization potential from within our growing content library and dynamic user community. Ultimately, we envision creating a global audio community, a place where anyone around the world can create, share, and connect through voice and across cultures.

Next, I would like to articulate the three strategic pillars that supported Lizhi's success in the past year, as well as will drive our growth momentum in 2020. The first is our continually growing and vibrant community; the second is our advanced AI technology capabilities; and the third is the strength of our diverse monetization capabilities and abilities to explore new business models.

As we strategically work to promote vibrant interaction and engagement among users and content creators on our platform, we have built a robust and sustainable social ecosystem of stakeholders that grows and attracts new users in a virtuous-like cycle. Our initiatives to increase vitality of our UGC community include introducing new product features such as Rlog, optimizing operational tools and providing incentive programs for content creators that inspire a robust long-tail content creation and curation. We're confident that our continuous efforts to strengthen the bonds between hosts and users will lead to higher growth in our business and more monetization opportunities.

There is no doubt that AI technology is transforming the way people create and share audio content in today's world. We are capitalizing on the significant opportunities that AI brings to our industry and are focused on its far-reaching potential to bring innovation, advancement and empowerment not only in content creation by unleashing creativity and boosting diversification but also in content distribution and in creating a superior user experience.

Through enhanced AI and big data technology, our personalized content recommendation mechanism is now able to provide users with highly tailored and curated content that delivers a more intimate audio experience that transforms the way people discover and enjoy audio content.

Looking ahead, exploring various monetization opportunities within our portfolio of audio entertainment products will remain a top priority. We are proud our results in 2019 has demonstrated solid growth in revenues from the audio entertainment segment, and provided evidence of our strong value proposition in this underpenetrated area. We will continue to build out our organic funnel to drive traffic from our large and ever-growing podcast user base into audio entertainment segment.

Furthermore, we are exploring opportunities that allow us to diversify commercialization models and further unlock the significant growth potential, including paid-content, membership, and advertising. We will also continue to expand use scenarios that create a truly interactive and immersive audio experience for users in the coming IoT era.

When it comes to the impact of the COVID-19 epidemic, first of all, our hearts are with the people who are affected, and we would like to extend our respect to those who are fighting against the outbreak. While acknowledging its disruption to China's macroeconomics and negative impact on business operations, we also believe that it brings certain opportunities, especially for the online sector.

With offline activities in China largely canceled since January and many communities remaining in temporary lockdown, travel restrictions or other form of quarantine, people have recognized online audio as a convenient and engaging resource, evidenced by the increased popularity and activities of our UGC community since the outbreak. Many people use Lizhi as a destiny for companionship, learning and social needs.

We are also seeing an uptick in user engagement on our platform in terms of average time spend, volume of content creation and interaction, and we are working to maximize the growing level of awareness of our brand, products in the market.

Additionally, Lizhi has been proactively helping those that have been significantly impacted by the COVID-19 outbreak. Toward this end, we have organized a series of online events including Together Fighting Against COVID-19, Lizhi Companionship Program, Voice from Our Heart, leveraging strong companionship and emotional resonance from the power of human voice, to provide our users with supports in terms of COVID-19 prevention measures and relieving psychological pressure.

Lizhi made a donation to the special emergency COVID-19 medical fund set up by Sun Yat-sen University and launched a special virtual charity gifting channel on our platform. In total, we donated approximately RMB2 million including funds and supplies of aid.

In summary, we are extremely encouraged with our momentum entering into 2020. Going forward, we will continue to work tirelessly to expand our user base and further enrich our monetization models. We will also continue to invest in AI technology, as we see its various applications as a significant catalyst for meaningful business growth in the coming years.

With that, I will now turn the call over to our CFO, Ms. Catherine Chen, who will discuss our key financial and operational results.

Thank you, Marco, and hello everyone. We are very pleased to conclude a robust year of 2019 on a strong note recording full year revenue of approximately RMB1.2 billion. For the fourth quarter, we continue to deliver solid growth momentum with net revenue increasing by 52.2% year-over-year to RMB365.3 million. Within it, audio entertainment revenue grew by 51.7% year-over-year to RMB360.4 million primarily driven by increasing in user spending on our interactive audio products.

It is also encouraging that our podcast, advertising, and other revenues realized substantial growth of 108.1% comparing to the prior year per period as we were well positioned to capitalize on diverse commercialization opportunities presented by our robust, long-tail content library.

Our revenue screens for the quarter were bolstered by strong user growth and increasing conversion of paying users. To illustrate, our average total mobile MAU increased by 33.8% year-over-year to hit 51.9 million and average monthly paying users reached 434.1 thousand representing a 71% year-over-year growth.

User growth was driven by our focus on motivating content creation and sharing through Lizhi's self-developed, simple, and intuitive audio tools. Also, increasing vitality of our community strengthened user engagement and contributed to the robust growth in paying user base which was highlighted by the meaningful growth in some metrics.

To illustrate, our monthly active content creators have increased from 5.3 million in 2018 4Q to 5.9 million in 2019 4Q. The average daily user time spent has increased to 52.6 minutes in 2019 4Q from 45 minutes in 2018 4Q. The monthly active -- the monthly average total interaction has increased to 2.7 billion times in 2019 4Q from 2.3 billion times in 2018 4Q.

Now, I'd like to walk you through more details on our fourth quarter 2019 financial results. Net revenue were RMB365.3 million in the fourth quarter of 2019 representing an increase of 52.2% from RMB240 million in the same period of 2018.

Audio entertainment segment revenue increased by 51.7% to RMB360.4 million in 4Q 2019 from RMB237.6 million in 4Q 2018. The increase was mainly attributable to the increased user spending on our interactive audio products.

Podcast, advertising, and other revenues increased by 108.1% to RMB4.9 million in 4Q 2019 from RMB2.4 million in same period of 2018. The increase was primarily attributable to increased user spending on our paid content services mainly driven by increase in the number of paying users.

Cost of revenues increased by 77.5% to RMB300.8 million in the fourth quarter of 2019 from RMB169.5 million in 4Q 2018. The increase was primarily due to the growth of revenue sharing fees and other costs generally in line with the growth of our audio entertainment business and short-term supporting and incentive program we launched in the third quarter of 2019, which incurred additional revenue sharing fees to encourage long-tail content creation, enhance user spending, and attract more hosts and users to our new podcast and interactive audio podcast -- products and features.

Revenue sharing fees increased by 75% from RMB160.2 million in 4Q 2018 to RMB280.9 million in 4Q 2019 primarily due to an increase in the revenue sharing fees and to content creators, which was attributable to the growth of our audio entertainment business, the content creators supporting and the incentive program we launched in the third quarter of 2019.

Bandwidth costs increased by 75.4% to RMB2.1 million in 4Q 2019 from RMB1.2 million in 4Q 2018 primarily as a result of increased bandwidth usage due to an increase in active user base and our platform and our business growth.

Gross profit decreased by 8.6% to RMB64.4 million from RMB70.5 million in same period of 2018.

Gross margin decreased to 17.6% in 4Q 2019 from 29% in 4Q 2018.

Operating expenses were RMB96 million in the fourth quarter of 2019 representing an increase of 41.9% from RMB67.8 million in the same period of 2018. Among the operating expenses, sales and marketing expense decreased by 0.9% to RMB28.8 million in 4Q 2019 from RMB29 million in 4Q 2018 primarily attributable to a decrease in expenses related to promoting activities in 4Q 2019.

Research and development expenses increased by 77.9% to RMB52.3 million in 4Q 2019 from RMB29.4 million in 4Q 2018 mainly due to our efforts in the development of AI applications and enhancing data security.

General and administrative expenses increased by 61.8% to RMB15.1 million in 4Q 2019 from RMB9.3 million in 4Q 2018 primarily due to an increase of the number of our staff in infrastructure functions.

Operating loss was RMB31.7 million in 4Q 2019 compared to an operating profit of RMB2.7 million in same period of 2018 primarily due to the increase in R&D expenses and the incentives and subsidies to content creators.

Net loss was RMB29 million in 4Q 2019 improved from RMB48.5 million in the third quarter of 2019.

The net margin for fourth quarter 2019 is negative 7.9% improved from negative 14.7% for the third quarter of 2019 primarily due to the improved operation efficiency and decrease of operating expenses.

Net loss attributable to Lizhi's ordinary shareholders was RMB302.8 million compared to RMB58.5 million in the same period of 2018.

Non-GAAP adjusted net loss attributable to Lizhi's ordinary shareholders, which excludes accretions to preferred share redemption value was RMB29.0 million in the fourth quarter of 2019 compared to non-GAAP adjusted net income of RMB2.0 million in the same period of 2018.

Basic and diluted net loss per share were RMB1.16 compared to RMB0.23 in the same period of 2018. Non-GAAP basic and diluted net loss per share were RMB0.11.

To be mindful of the length of our earnings call for the fiscal year of 2019 financial results, I will encourage listeners to refer to our earnings press release for further details.

Business outlook. For the first quarter of 2010, we currently expect total net revenue to be in the range of RMB350 million to RMB370 million representing a YoY growth between 33.8% and 41.4%. This forecast reflects our current and preliminary views on the market and operational conditions which are subject to change.

This concludes all of our prepared remarks today. I will now open the call to questions. Operator, please go ahead.

Ladies and gentlemen, we will now begin the question and answer session. (Operator Instructions)

Your first question comes from the line of Vicky Wei from Citi. Please ask your question.

(Speaking in Foreign Language). Good evening management, thank you for taking my question and congratulation for the first earnings release. My first question is about user traction, will management provide some color on the first quarter user growth and also the target for 2020 MAU and new user acquisition strategy.

My second question is about profitability trend in the coming quarter. So, will management please provide some color on revenue sharing with hosts and also sales and marketing expenses. Thank you.

Okay. (interpreted) We have observed that in 1Q 2020, the MAU has increased from 4Q 2019. Detailed numbers will be released in 1Q results.

Lizhi's innovative product and highly engaged audio community have attracted massive users. Lizhi has large portion of young generation users and users from lower-tier cities. In 2020, we will stick to the strategy focused on driving organic traffic growth through product innovation, user creation and sharing to bring in organic traffic. Meanwhile, acquiring traffic in a tactic way. Also, we will further develop our applications on smart speakers in different IoT scenarios and develop overseas product.

Currently, online audio users penetration within the mobile internet users is still low. We believe there is still tremendous growth opportunities. According to the estimated data from iResearch, 2019 China online audio users penetration within the mobile internet users, the ratio is around 56.2%, which is lower than online music, which is 86.2% and games which is 81.8%.

And also in 2019 in U.S., online audio users as percentage of total mobile internet user, the percentage is around 83.1%. So, comparing all these [matrix] (corrected by company after the call), there are still lots of space for online audio in China to further penetrate.

And also according to iResearch data, the China online audio users, the size will increase from, in 2019, 490 million to around 900 million in 2023.

In 2020, the company will gradually adjust our incentives and subsidy policy to content creators meanwhile introducing new products to improve growth profit. We estimated in the coming quarters, several quarters in 2020, the revenue sharing fees and subsidies to content creators will decrease compared to 4Q 2019 and the growth margin will get further improved.

In addition, we'll continue to innovate in business operating models to improve the overall gross margin.

Now, with the increasing revenue growth and operational improvement, we expect percentage of operating expenses as of revenue will further decrease in the coming quarters of 2020. We also expect that there's marketing expenses as percentage of revenue as well as the R&D expenses as percentage of revenue will gradually decrease in 2020 as well.

That is all of our answer. Hope this address your questions.

Your next question comes from the line of Bo Pei from Oppenheimer. Please ask your question.

(Spoken in Foreign Language). I will translate for myself. My question is about the competitive landscape in audio -- online audio in China, so -- because most of our revenue is generated from audio live steaming. So, we know some competitors, the other industry peers, also have similar functions and even some short video platforms are testing audio live streaming functions recently. So, my question is how does the management think about our competitive landscape in the next couple of years? Thank you.

(interpreted) So, we believe that -- actually we and the peers you mentioned are focusing on different business model that clearly differentiate us from others. Nowadays we are already a leading online UGC audio community and interactive audio entertainment platform in China. And we keep focus on cultivating a highly engaged user community and UGC model in order to enable everyone to showcase their local talents. And I believe this is quite different from all the other peers you mentioned.

So, you see there are some platforms are rolling out their audio services and I believe this is a very good trend, which also help to increase the penetration of online audio. Thank you for your question.

Your next question comes from the line of Vincent Yu from Needham. Please ask your question.

Sure. Hi, Marco and Catherine. Thank you for taking my question. So, my first question is about impact from coronavirus. So as you mentioned, we are seeing some positive impact. Can you share some insights on the new user retention paying conversion and other engagement metrics such as listening hours? My second question is about revenue diversification plan in 2020, what's our strategy in -- on new product, new features and the other new initiative such as game cooperation and overseas business. Thank you very much.

(Spoken in Foreign Language).

(interpreted) Here are our views on the impacts of our business from COVID-19 epidemic. As users spend less time on offline activities due to a lockdown from virus prevention, it is conducive to the development of online products. Lizhi has been proactively helping those that had been impacted by the outbreak.

To this end, we have organized a series of events including Together Fighting Against COVID-19, Lizhi Companionship Programs, Voice from Our Heart, et cetera, as we mentioned before, leveraging our strong companionship and emotional resonance from the power of voice to provide our users with support.

In terms of prevention measures, relieving psychological pressures and supporting them to -- for companionship, learning and entertainment.

From a medium to long term perspective, the user and consumption behavior of audio are somewhat habitual and can be cultivated. Therefore, we believe a large portion of online users will be retained after the epidemic is over.

From our observation, during the epidemic quarantine period, that we see the engagement of our users on our platform has increased and also the length for people to listening to podcast and live streaming has increased substantially.

And also since the outbreak, the activeness of our content creators increased significantly as well with daily average number of podcast uploaded by podcast hosts and daily average number of live streaming session hosted by live streaming host increased over 10% from before the outbreak. And also, the interactions between the content creators and user also improved.

And also to give some detailed examples, since the outbreak, there are many Chinese traditional talk show performers and China traditional drama performers that they are not able to play offline. So, they moved online to Lizhi platforms and we see it has been extremely welcomed and welcome everybody to log into Lizhi's app to listen to this kind of performance and live sessions.

And also we see the users using Lizhi for their reading purposes. For example, there are massive amount of students. They are using Lizhi to do their -- to record their readings and also to do their learning and homework.

And in terms of diversification of monetization strategies, in 2020, we will continue to focus on audio social entertainment while steadily growing our advertising and other business further exploring opportunities to diverse commercialization models that include advertising, audio education, fan membership as well as collaboration with smart devices providers such as Baidu, Xiaodu to explore more audio use cases and product offerings in the Internet of Things ecosystem. And we believe they will -- this will further unleash our -- of our growing monetization opportunities among our users.

Your next question comes from the line of Xingchen Yu from UBS. Please ask your question.

(Spoken in Foreign Language). Let me translate myself. Can you please provide any comments on the supply and competition of content creators? Thank you very much.

As we mentioned, that the company is also gradually adjusting our subsidy policies toward the content creators and also we are introducing different format of interactive audio products which have different scheme of revenue sharing. So, this will further contributed to the decreasing -- our aim to decrease on our revenue sharing percentage.

And in terms of the supply of content creators that we believe that given that we are the largest UGC online audio community. So, we have actually massive amount of content creator base, which is around 5.9 million monthly active content creators on our platforms already. And this number has been increasing from 5.3 million in 4Q 2018, so we see with the way that we continue to lower the barrier for creation that providing them with professional tools on our app that everybody can easily create and share, create a very professional quality like audio content. And this helps to unleash the productivity for many like normal people for them to create and publish their audio contents on our platform.

And at the same time, we also roll out our podcast supporter program as well as our Podcast Academy to support the content creators on our platform to further growth. So, we see like it was this kind of massive UGC content creator base, there is actually a sufficient and massive demand for content creators.

Thank you for your question.

Your next question comes from the line of Ribery Gu from Credit Suisse. Please ask your question.

(Spoken in Foreign Language). Thanks management for taking my question. Could the management share with us more details about the overseas expansion strategy for the Lizhi Company this year? Thank you.

(interpreted) Thank you for your question. Toward overseas expansion, we are still in exploring and testing period for products toward Middle East and Southeast Asia region. And the overseas development is still in early stage. We will release further details at later stage. Thank you for your question.

Your next question comes from the line of Billy Leung from Haitong International. Please ask your question.

(Spoken in Foreign Language). Thank you management for taking my question. I just have one question in relation to our paying users. In the prepared remarks, we mentioned that the quarter four paying users rose faster than MAU. I just want to ask management what their view on the paying user ratio is and if we have any targets on this? Thank you.

(interpreted) So regarding paying user growth that in fourth quarter 2019 that we have rolled out supporting program to our mid and long-tail content creators and hosts. And these content creators and hosts have driven -- the payment and paying user conversion among their fans and we see this policy and this strategy has worked well and has proven to be successful. As a result, our overall paying user has increased solid quite substantially in fourth quarter 2019 compared to the period of the year before.

So for the overall platform, the paying user, the number of total monthly paying user, our platform reached 434,000 in 4Q 2019, increased by 13% quarter over quarter. And also, increased by 71% on YoY basis and also we have seen the paying ratio of our audio entertainment segment has remained steady as over 6% and we have seen, there is still some gap between the level of paying ratio in audio entertainment segment compared to those of video live streaming.

And we believe with the help from AI technology and improving like a recommendation system, we are able to convert -- improve the conversion of paying user to increase the paying ratio among audio entertainment segment to be -- to increase to our level that is closer to the audio live streaming peers.

And also regarding our podcast segment, that we still have a massive amount of podcast that is available to be converted into paid content and also we are rolling out our own fan membership programs which all helped to increase the paying ratio among our podcast users as well which contributed to the overall improvement of the paying ratio of the -- on a comprehensive overall platform basis.

As there are no further questions, now I'd like to turn the call back over to the company for closing remarks.

Thank you once again for joining us today. If you have further questions, please feel free to contact Lizhi's Investor Relations through the contact information provided on our website, ir.lizhi.fm or the TPG Investor Relations.

This concludes this conference call. You may now disconnect your line. Thank you.