Sound Group Inc (SOGP) 2021 Q2 法說會逐字稿

Hello ladies and gentlemen. Thank you for standing by for LIZHI INC.'s second quarter for 2021 earnings conference call. At this time, all participants are in listen-only mode. After management's remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to your host, Effy Kang, Head of Capital Markets for the Company. Please go ahead.

Thank you very much. Hello everyone and welcome to LIZHI INC.'s second quarter 2021 earnings conference call. We released our financial and operating results via newswire services earlier today and they are available online. Participants on today's call will include our Founder and CEO, Mr. Marco Lai, our COO, Mr. Zelong Li, and our Acting CFO, Ms. Chengfang Lu.

Management will begin with prepared remarks and the call will conclude with a Q&A session. As a reminder, this conference is being recorded. In addition, an Earnings 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 discussions 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 our 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 unaudited non-GAAP measures to unaudited GAAP measures.

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

(spoken in Chinese)

(interpreted) Hello everyone. Thank you for joining us today.

(spoken in Chinese)

(interpreted) We are very pleased that all aspects of our business maintained robust growth in the second quarter of 2021. We are dedicated to the audio-centric globalization strategy and to bringing diversified audio products to a broader user base. Our continuous efforts to advance in-house technology development, optimize product features and improve user experiences resulted in a steady growth of our user base in the second quarter with total average mobile MAUs reached 60.9 million and average monthly paying users rose to 494 thousand. Driven by ongoing enhancements in our commercialization capability, our revenue in the second quarter has reached another record high of RMB559 million, up 59% year-over-year.

(spoken in Chinese)

(interpreted) Our solid performance of core metrics during the quarter reaffirmed effectiveness of our strategy and the increasing efficiency in our execution, underscoring our competitiveness in the online audio market. In the second quarter, our audio-centric UGC community built on the LIZHI App to appeal to younger generations continued to demonstrate high levels of user engagement and interaction.

In addition, we have further improved integration of our pre-recorded content division and audio entertainment division, and effectively increased user penetration rate of audio entertainment to 14.6% in the second quarter of 2021 from 13.2% in the same quarter last year. This achievement also brings more space to improve paying user conversion, further strengthening our commercialization capabilities in audio entertainment and driving the strong growth in revenue.

(spoken in Chinese)

(interpreted) On the other hand, we have successfully expanded user base to younger and middle-aged cohorts in higher tier cities, supported by effective operations on our vertical podcast platform LIZHI Podcast. Through innovations on podcast features and development on multi-devices accessibility, we expect to further increase the influence of podcasting and diversify our audio ecosystem.

In the second quarter, we continued to leverage our livestream podcast feature to generate diverse content creation opportunities for original podcasters. We have also partnered with several brands and companies to devise exceptional livestream podcast programs, delivering unique listening experiences to audiences.

Furthermore, we are working to strengthen our foothold in the in-car audio market and expedite the implementation of our in-car audio products. These efforts include expanding collaborations with a wide range of leading companies and technology platforms and optimizing mobile applications catering to in-car usage scenarios, which greatly improved listening experiences across multiple terminals. We are seeing that users' listening time on LIZHI Podcast has increased substantially in the second quarter.

(spoken in Chinese)

(interpreted) Turning to our globalization progress, our TIYA App, an audio-based social networking app targeting overseas markets, continued to grow rapidly, highlighted by growing user base with MAUs in June rising to more than 3.5 million, representing a 92% increase over average MAUs in the first quarter of 2021. In terms of our operational strategy for TIYA, we are committed to improving user engagement and user activeness through continuous optimization and iteration of product, as well as enrichment of interactive features.

In this June, the number of active groups on TIYA increased by more than 360% from this March, and the number of active chat rooms increased by more than 180% from this March. We are also seeing that the amount and diversity of social networking topics and interest groups on the platform are increasingly expanding, bringing more new users to join the platform and effectively enhancing TIYA's network effect.

(spoken in Chinese)

(interpreted) Technological empowerment is a crucial driver for our vigorous business development. In the second quarter, we remained focused on advancing our core technology capabilities. For example, we are striving to make DOREME, our in-house developed audio technology solution, compatible with more in-car operating systems and Internet of Vehicles platforms.

Our goal is to ensure superior audio quality across different in-car systems and satisfy user demand for real-time audio interaction. Our AI technology is also driving our overall business development, including enabling a better recommendation mechanism and delivering a personalized audio experience across multiple devices. In the future, we will further refine our core technologies to support and empower our robust business growth.

(spoken in Chinese)

(interpreted) Alongside driving the effective growth and strategic execution of various businesses, we also actively undertake corporate social responsibility as a content community platform. For example, on the National Disability Day, we released a short documentary film to highlight the stories of audio content creators with physical disabilities, who have showcased their vocal talents through creating audio programs titled "see the world through ears" on LIZHI App. We are also hoping to help young people with physical disabilities to create more value via voices through the influence of our platform.

In addition, during the Henan floods last month, leveraging the advantages of our voice platform, we launched various audio contents of "Supporting Henan" through all channels, rallied the power of voices to encourage content creators to publish the emergency rescue measures, and promoted psychological counseling contents and relevant science educational podcasts. We also showed our support and respect for rescue staff through various content features, delivering the heartwarming initiatives to a wider range of audiences through voice.

(spoken in Chinese)

(interpreted) In summary, we are pleased to see that LIZHI's global business continued to experience strong growth in the second quarter of this year, laying a solid foundation for our long-term growth. Going forward, we will remain steadfast in our commitment to globalization strategy, further promoting the development of our domestic business and unleashing the commercialization potential through effective operating strategies. We will further advance our podcast business development and explore diverse audio-applicable usage scenarios, bringing innovative podcast experiences to a broader user base.

In overseas market, we will continue optimizing our audio social products, providing an even better social networking experience to our users. Meanwhile, we will progressively explore various overseas markets and create more possibilities for the long-term development of our global business. Furthermore, we are committed to building a more competitive audio ecosystem to achieve sustainable long-term growth as we continue to advance our in-house core technology capabilities.

(spoken in Chinese)

(interpreted) Thanks everyone. With that, I will now turn the call over to our COO, Mr. Zelong Li, who will discuss our business development in more details.

(spoken in Chinese)

(interpreted) Hello everyone and thank you for joining us today. As Marco discussed, in the second quarter, we maintained strong growth momentum with a solid set of financial and operating results. I am happy to share with you a bit more on our operating achievements.

(spoken in Chinese)

(interpreted) First, in terms of our audio community on LIZHI App, our persistent efforts in optimizing audio entertainment products and audio creation tools improved overall user experiences, increased user activeness and stimulated user engagement in audio content creation. During the second quarter, users' monthly average total interactions on the platform reached 3.4 billion. As of June 30, cumulative pieces of audio content uploaded to our platform reached 293 million.

In the audio entertainment division, we conducted various operational campaigns to encourage content creators to participate in audio entertainment creation, which in turn attracted more users to join real-time audio interactions. This has further unleashed our audio entertainment business's commercialization potential, reflected by our growing audio entertainment user penetration rate which drives the paying user conversion. On the other hand, based on our effective user positioning, we continued to develop market-leading content categories catering to the younger generation.

Through strengthened content ecosystem and content operation strategy toward higher commercialization potential, such as ACG-centric interplay sessions and emotion accompanying programs, we have effectively increased user willingness to pay and further enhanced our commercialization capability in audio entertainment division.

(spoken in Chinese)

(interpreted) In terms of our global business, as an audio social platform targeting younger generation, TIYA keeps focused on optimizing product features to meet various social needs of users based on younger generation's interests and hobbies. In March 2021, we launched TIYA's Group function, which helps users with common interests be connected, enjoy real-time audio interactions, and become friends on our platform. The number of active groups on the platform has significantly increased.

In addition, we introduced mini-games such as Ludo and Sweet Crush into live chat rooms and launched a game-sharing function in conjunction with the theme of gaming, aimed at promoting effective communication and interaction among users and meet more user demands. Our continuous efforts in product optimization effectively improved user experience and user engagement, and we are gaining a growing number of new users from spontaneous invitations from friends on TIYA.

As of June 30, the number of TIYA-based user friendship connections increased by 120% from this March. Looking ahead, we will remain committed to executing our globalization strategy as we believe that the development of audio-based social networking business is able to bring more growth potential for the overall business.

(spoken in Chinese)

(interpreted) In terms of the development of our podcast business, we are committed to differentiating our competitive advantages through innovation of features and podcast content, including a series of livestream podcast programs to increase user activeness and interaction. For example, in June, in collaboration with the Aranya Theater Festival, we launched the "Migratory Birds Live Radio" project, which featured a 300-hour non-stop audio live streaming for the first time in China's online audio industry.

Built on a mix of live stream dialogues, voice recordings, and outbound dialing interactions, this pioneering livestream session comprehensively showcased the communication and theater creation activities of 300 theater lovers and practitioners. This event spotlights our horizon-broadening approach to merge livestream feature into podcast. Additionally, we leveraged this prestigious session to create highlight edition and exclusive podcast sessions available on our platform.

During the second quarter, we also hosted the "Voices of Technology and Science Week" online forum, China's first livestream podcast forum themed on science and technology. This event featured a number of renowned speakers discussing a variety of trending topics through livestream podcasts, greatly stimulating interactions among podcast listeners.

(spoken in Chinese)

(interpreted) In addition to our innovations in podcast content and product features, we have also formed more strategic collaborations to increase the popularity and availability of podcasts across multiple terminals. Recently, in cooperation with more leading automakers and Internet of Vehicles platforms, including WM Motor, Li Auto, Tencent WeScenario, and PATEO IoV platform, we worked to make LIZHI Podcast accessible in more vehicles, providing a diverse audio experience to a broader user base.

At the same time, we continuously optimize our product features to ensure a better in-car listening experience. We introduced car-mode for mobile app, enabling users to enjoy personalized podcast content supported by AI-powered content recommendation and distribution mechanism with only one-click. We believe that our in-car audio solutions and mobile apps can build synergies, encompassing podcast content across multiple devices spanning a variety of usage scenarios to bring podcast offerings to a wider range of users, and further enhance the influence of podcast in the industry.

(spoken in Chinese)

(interpreted) Going forward, we remain committed to our mission and to driving the development of our worldwide business to build LIZHI into a leading global audio platform through our continuous efforts on audio innovation and technology advancement.

(spoken in Chinese)

(interpreted) Thanks everyone. With that, I will now turn the call over to our Acting CFO, Ms. Chengfang Lu, who will discuss our financial results in more details.

Thank you, Zelong, and hello everyone. I will now provide a brief overview of our financial results for the second quarter of 2021.

As we move forward with our expansion strategy, our operational and financial performance for the second quarter continued to demonstrate our strong growth trajectory and strengthened commercialization capabilities. We're also pleased to see gross margin expansion of 400 basis points year-over-year alongside our strong topline growth during the quarter. Looking ahead, we will remain focused on our globalization strategy and improving our operational and technological capabilities to foster our global audio ecosystem and deliver long-term sustainable growth.

In the second quarter, our total net revenues were RMB559.3 million, representing an increase of 59% from RMB350.9 million in the second quarter of 2020, mainly attributable to our growing user base and increase in the average spending of paying users in our audio entertainment products.

Cost of revenues was RMB400.5 million in the second quarter of 2021, representing an increase of 51% from RMB265.2 million in the second quarter of 2020. The year-over-year increase was primarily driven by an increase in revenue sharing fees to our content creators, payment handling costs and bandwidth costs, which were generally in line with our business growth.

Gross profit was RMB158.8 million in the second quarter of 2021, representing an increase of 85% from RMB85.7 million in the second quarter of 2020.

Non-GAAP gross profit was RMB161.9 million in the second quarter of 2021, representing an increase of 79% year-over-year.

Gross margin for the second quarter of 2021 increased to 28% from 24% in the second quarter of 2020. Non-GAAP gross margin for the second quarter of 2021 grew to 29% from 26% in the second quarter of 2020.

Operating expenses increased by 72% year-over-year to RMB190.3 million in the second quarter of 2021.

Research and development expenses were RMB60.9 million in the second quarter of 2021, representing a year-over-year increase of 11%, primarily due to the increasing salary and welfare benefits expenses related to an increase in the number of our research and development staff.

Selling and marketing expenses were RMB106.3 million in the second quarter of 2021, representing a year-over-year increase of 241%, primarily due to our increased investment in branding and marketing for our products and brand name.

General and administrative expenses were RMB23.1 million in the second quarter of 2021, representing a year-over-year decrease of 7%. The decrease was mainly due to the decrease in other professional service fee, partially offset by the higher salary and welfare benefits expenses.

Operating loss was RMB31.6 million in the second quarter of 2021, up by 26% from RMB25.0 million in the second quarter of 2020. Non-GAAP operating loss was RMB21.7 million in the second quarter of 2021, compared to RMB11.2 million in the second quarter of 2020.

Net loss was RMB29.0 million in the second quarter of 2021, up by 32% from RMB22.0 million in the second quarter of 2020. Non-GAAP net loss was RMB19.2 million, compared to RMB8.2 million in the second quarter of 2020.

Basic and diluted net loss per ADS were RMB0.58 in the second quarter of 2021, compared to RMB0.48 in the second quarter of 2020. Non-GAAP basic and diluted net loss per ADS were RMB0.38 in the second quarter of 2021, compared to RMB0.18 per ADS in the second quarter of 2020.

As of June 30, 2021, we had cash and cash equivalents, restricted cash, as well as short-term investments of RMB494.7 million.

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

Thank you. (Operator Instructions). And for the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. For the sake of clarity and order, please ask one question at a time, management will respond, and then feel free to follow up with your next question. But we have a question on the queue. So, I will first go to Vincent Yu from Needham & Company. So, please ask your question, Vincent.

Thank you and thank you management for taking my question and congrats for the strong quarter results. I have three questions. The first question is, I think in terms of like on the recreation side, so have we been communicating with regulators on the rollout of recreation on the overall streaming industry? Can management give us a sense of company's expectation and the impacts on LIZHI's operational results?

And the second question is on the as apps themselves. So, can management share with us how big is the user base who use LIZHI or use LIZHI Podcast app in the car and the overall size of LIZHI Podcast app?

And the third question is, does the company see any material change in user behavior for TIYA App as the economy continues to reopen? And it is like the streaming hours have been changed or decreased or increased or maintained like can we get any sense? So, I will translate for myself into Mandarin. So, (spoken in Chinese).

(spoken in Chinese)

I'll translate for Marco. So, Marco will answer the first question and our COO, Mr. Zelong Li, will answer the other two questions. So, Marco's answer it that like for recent years, the regulatory authorities have always attached importance to regulating the online entertainment industry, including the live streaming industry.

Tighter regulations may have some impacts and put pressures on some companies' business in the short-term. But we do believe that sound regulatory policies can standardize relative business operations, which is good for the long-term sustainable development of the entire industry.

(spoken in Chinese)

(interpreted) As an online audio company, we have always prioritized regulatory compliance and have been proactively and effectively communicating with regulators to have an accurate understanding of the relevant guidelines and requirements. In the last few quarters, we also have reported some information and we have [come out] some solutions regarding to the regulatory policies.

Meanwhile, we are earnestly conducting self-examinations of our internal compliance and data security measures to ensure that our business operations comply with the regulations.

(spoken in Chinese)

(interpreted) Based on our years of experiences in the industry, I think we have already had a relatively sound mechanism to meet the regulatory requirements. In the long-term, the online audio industry still has tremendous growth potential and LIZHI is committed to promoting stable and healthy development.

(spoken in Chinese)

I will translate for Mr. Zelong Li for the second and third questions. So, for the second questions, in terms of our in-car audio strategy, we are actually working to expand collaborations with a wider range of leading companies to make our in-car audio products accessible in more vehicles and then reach a broader user base. We have made significant progress recently in our co-operations with auto companies and have LIZHI Podcast launched on more in-car audio operating systems.

As of now, we have established collaborations with a total of 14 automakers. Besides those companies we have mentioned earlier, our in-car audio products have also been launched on vans and Audi's in-car operating systems through the IoV platforms.

(spoken in Chinese)

(interpreted) LIZHI Podcast has been operating for over half a year and now have performed well through our podcast innovations like live streaming podcasts and exclusive podcast episodes. We have effectively improved the average user time spent on LIZHI Podcast.

In the second quarter of 2021, the average daily time spent per user on LIZHI Podcast increased by around 10 minutes compared with the previous quarter, which also shows the effectiveness of our operational strategies and the improved user stickiness.

(spoken in Chinese)

(interpreted) In the future, we will continue to boost the development of LIZHI Podcast and our in-car audio business and increase the popularity of LIZHI Podcast by integrating into more in-car systems. We will also continue to enrich LIZHI Podcast content offerings to deliver more interesting content, meets users' demand with innovative podcast features and improve user stickiness.

(spoken in Chinese)

(interpreted) But at this moment, the user base for the in-car audio scenario and of the LIZHI Podcast is relatively small compared to our overall user base. We will share more data when that business grows to a certain scale.

(spoken in Chinese)

(interpreted) The third question is about the user behavior for the TIYA App, although most social activities are gradually returning to normalcy, but we are still seeing a lot of lasting changes in people's lifestyle brought by the COVID-19 pandemic. For example, online entertainment and online social networking are gaining widespread popularity and TIYA maintained its strong growth momentum in the second quarter.

(spoken in Chinese)

(interpreted) As we continue to optimize TIYA's product features, TIYA's user activeness continued to increase reflected by an increase in the number of active chat rooms and the number of user friendship connections. Also, the user time spent on TIYA also improved compared to the previous quarter.

(spoken in Chinese)

(interpreted) From a long-term perspective, we believe the online social networking is becoming a trend in the way people socialize. The integration of audio into social networking activities provides users a differentiated form of social networking from an innovative perspective and satisfying more of their social networking needs. Going forward, we will continue to optimize TIYA's product features connecting more users through voices.

This concludes the answers for Needham's questions.

Thank you. (spoken in Chinese)

Thank you.

Our next question comes from the line of Vicky Wei from Citi. So, please ask your question, Vicky.

(spoken in Chinese) So, good morning, management. Thanks for taking my questions and congrats on the solid quarter. So, will management share some color about revenue sharing ratio with hosts as industry peers continue to invest in audio live streaming? Thank you.

(spoken in Chinese) Thanks for the question from Vicky. Actually, we have diverse revenue sharing policies for content creators across different business divisions at different stages.

In the second quarter of this year, we achieved strong revenue growth, while we are also progressively adjusting our revenue sharing structure. In this quarter, our overall revenue sharing for content creators on our platform accounting around 65% of total revenue, representing a decline of about 4 percentage points year-over-year, which also effectively improved our gross margin.

And looking ahead, we will implement a comprehensive set of measures to calculate our content creators and keep a balance between the income growth of content creators and improvement of our profit margin by driving the topline growth.

For the content creators, we will adopt to various operational strategies, including traffic and creation support, attractive incentive policies and AI-driven content recommendations, among others, to enable content creators to attract more followers in wider popularity and increase their success on our platform.

On the user side, we will continue to focus on improving user engagements, promoting paying user conversion and increase users' willingness to pay to increase our overall revenue. I believe with our platform remains a good growth momentum, and our creators will experience a corresponding increase in income. And subsequently, this will allow us to further refine our revenue sharing structure.

In addition, we will continue to innovate new business model and explore more overseas markets, with growth potential to create new opportunities for our long-term and sustainable growth with higher profitability. Thanks.

Thank you.

There are no further questions now. So, 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 at ir.lizhi.fm or The Piacente Group Investor Relations. Thank you.

Ladies and gentlemen, that does conclude today's call. Thank you again for participating. You may now all disconnect. Thank you.