Sound Group Inc (SOGP) 2021 Q3 法說會逐字稿

Hello ladies and gentlemen. Thank you for standing by for LIZHI, Inc.'s Third Quarter 2021 Earnings Conference Call. (Operator Instructions). 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 the LIZHI, INC. Third 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, our 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 provision 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 also 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.

Please refer to LIZHI's earnings press release for a reconciliation of unaudited non-GAAP measures to unaudited GAAP measures. I will now turn the call over out Founder and CEO, Mr. Marco Lai. Please go ahead.

(through translator) Hello everyone. Thank you for joining us today. I will share our third quarter business overview and future development strategy. Then our COO Mr. Zelong Li will provide more details on the operation of each business line.

Overall, LIZHI continued to strive to build a competitive global audio ecosystem in the third quarter of 2021. Total average mobile MAUs reached 58.9 million and average monthly paying users was 485 thousand in the third quarter.

We remain focused on improving user experience and fostering our audio-centric community ecosystem to increase audio entertainment user base, strengthen user connections and stickiness, and support our sustainable growth. We are delighted to see the audio entertainment average mobile MAUs grew by 21% year-over-year to 9.17 million.

As we prioritize unlocking commercialization potential presented in audio entertainment business, coupled with the effective execution of our operational strategy, our third quarter revenue grew by 40% year-over-year to RMB505 million, pushing our total revenues for the first nine months of 2021 to surpass revenues for the full year of 2020.

In addition to revenue growth, we are pleased with the continued expansion of our overall gross margin, which grew to 30%, up 500 basis points year-over-year.

In terms of our strategic priorities in near future. First of all, we'll continue to build a sustainable and high-quality community ecosystem by providing more valuable content and audio-centric interactive scenarios, enhancing our commercialization capability and supporting more content creators to grow and develop in LIZHI's audio community.

At the current stage, our globalization strategy is to optimize products and ramp up localization teams. We strive to meet users' social networking needs in the digital era, capturing more growth opportunities for future prospects.

With respect to our audio roadmap geared for multiple devices, at the current stage, product optimization and technology innovation are our main focuses in this area. At the same time, we are strengthening our underlying architecture.

In addition, we continue to establish collaborations with more platforms to expand our reach in the in-car audio market. In addition, we will adhere to the long-term development pathway with technological empowerment and further apply our in-house-developed audio technology solution DOREME to more devices.

Beyond that, we are stepping up the development of our in-house instant messaging technology. We are expecting to provide more tailored technological support to our various products.

In conclusion, we have great confidence in our prospects. We will continue to execute our globalization strategy in the next phase. By maximizing LIZHI's advantages, we are expecting to unlock greater growth potential globally and achieve long-term sustainable development.

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.

(through translator) Hello everyone and thank you for joining us today. Next, I'd like to provide more detailed updates of each business line.

Starting with our audio entertainment business. We aim to foster a sustainable ecosystem across our community by pivoting to optimizing product functions and harnessing several key content categories.

To further amplify our commercialization capabilities and efficiency, we are working to refine our product operations, which involves employing more precise user targeting, focusing heavily on content categories with strong commercialization capabilities, optimizing our marketing strategy, and harnessing high-performance channels.

We believe that taking these important steps now will lay a solid foundation for us to grow our sustainable ecosystem, further improve paying user conversion rate and operational efficiency, and ultimately, enable us to achieve a solid long-term growth.

Moving to our global business, TIYA is positioned as a digital social networking platform for young people. We continue to improve and optimize our products to meet their social needs in diverse scenarios based on their different hobbies, interests, and the trendy lifestyles.

In the third quarter, we concentrated on building a local team for our overseas business development, and upgrading product features and functions to position ourselves among a wide variety of user groups. Our emphasis on user experience and user retention, is designed to allow our user base to achieve an organic growth.

As part of our product optimization strategy, we upgraded TIYA App's friend status feature and the discovery channel. We now offer more interactive features to guide users to adopt different tools for their interactions on the platform.

In particular, we launched "My Friends" live status feature that allows users to find friends in a similar status or mood, which reinforces friendship bonds on the platform, and ensure a smoother online social experience. We continued to roll out innovative features to TIYA App.

Some of these we added recently include newly optimized mini-games and screen sharing options, both of which provide more diverse ways for users to interact socially, enhancing user stickiness and engagement.

After these product upgrades were launched, we observed a marked increase in the interaction rate of new TIYA users with friends, and an uptick in the average time spent per user on TIYA.

In September, the daily average number of messages sent per user grew by 57% compared with June, and user's number of friend pairs was 64% higher than that in June. In the near term, our priority is to continue refining our products to improve these metrics even further.

We will be paying close attention to key metrics such as user's activeness and interaction levels, while further cultivating user habits, and strengthen user relationships on the platform.

In the third quarter, we also continued to expand LIZHI Podcast's footprint in the in-car audio market by broadening and deepening our collaborations with auto companies and the Internet of Vehicles platforms. We have also achieved more official recommendations from auto companies.

Currently, our strategic focus revolves around product optimization and technology innovation, including audio application functions for in-car scenarios such as voice-activated control, gesture operation, and seamless connectivity.

We are pleased that our strong technological capabilities are boosting LIZHI Podcast's competitive performance in the in-car market. For instance, we have recently been integrated into Huawei's HarmonyOS ecosystem through technological innovation. And as the first platform to launch in-car live-stream podcasts, LIZHI Podcast rolled out one-click seamless connectivity feature.

It supports cross-screen connection to achieve two-way seamless connectivity between mobile devices and vehicles. Through this technology, we provide uninterrupted live-streaming podcast experiences to users, thus becoming the first podcast platform in China that enables two-way seamless connectivity in multiple scenarios.

We believe that our technological expertise and product innovation are key to securing a competitive edge in the in-car audio market. In the future, we will continue to optimize our in-house audio technology solution.

Our goal is to accumulate more technological experiences and improve the core technology for multi-device applications of the podcast platform while satisfying the differentiated demands of various auto companies and IoV platforms.

In summary, achievements and experience we have gained in the third quarter have set the stage for our future development. We are optimistic about future growth opportunities in audio industry.

We will continue working for long-term success and building a leading globalized audio platform. 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.

Okay, thank you, Zelong, and hello everyone. First, we are very pleased to see another solid year-over-year revenue growth in the third quarter. Driven by our improved operational strategy, our gross margin grew to 30%, up 500 basis points year-over-year.

We believe the audio entertainment ecosystem we've built is fundamental to our long-term growth. Looking ahead, we will continue optimizing our audio entertainment business, enhancing commercialization capabilities, and leveraging our technology innovation and expertise, as well as actively exploring the international market in order to achieve sustainable growth.

Now, I'm providing a brief overview of our financial results for the third quarter of 2021. In the third quarter, our total net revenues were RMB504.8 million, representing an increase of 40% year-over-year, primarily driven by the growth of paying users and enhanced commercialization capabilities of our audio entertainment products.

Cost of revenues was RMB353.6 million in the third quarter of 2021, representing an increase of 31% year-over-year, mainly attributable to an increase in revenue sharing fees to our content creators, salary and welfare benefits expenses and bandwidth costs, which was in line with our business growth.

Gross profit was RMB151.3 million in the third quarter of 2021, representing an increase of 67% year-over-year. Non-GAAP gross profit was RMB154.5 million in the third quarter of 2021, representing an increase of 68% year-over-year.

Gross margin for the third quarter of 2021 increased to 30% from 25% in the third quarter of 2020. Non-GAAP gross margin for the third quarter of 2021 grew to 31% from 25% in the third quarter of 2020.

Operating expenses increased by 91% year-over-year to RMB191.3 million in the third quarter of 2021.

Research and development expenses were RMB73.4 million in the third quarter of 2021, representing a year-over-year increase of 32%. The increase was primarily due to the increased salary and welfare benefits expenses related to an increase in the number of our research and development staff and averaging salary.

Selling and marketing expenses were RMB88.2 million in the third quarter of 2021, compared to RMB27.1 million in the third quarter of 2020. This increase was primarily due to our increased promotion and marketing activities.

General and administrative expenses were RMB29.7 million in the third quarter of 2021, representing a year-over-year increase of 71%. The increase was mainly due to the increase in salary and welfare benefits expenses and other professional service fee.

Operating loss was RMB40.1 million in the third quarter of 2021, compared to RMB9.6 million in the third quarter of 2020. Non-GAAP operating loss was RMB30.1 million in the third quarter of 2021, compared to RMB2.9 million in the third quarter of 2020.

Net loss was RMB37.1 million in the third quarter of 2021, compared to RMB6.1 million in the third quarter of 2020. Non-GAAP net loss was RMB27.2 million, compared to non-GAAP net income of RMB0.6 million in the third quarter of 2020.

Basic and diluted net loss per ADS were RMB0.73 in the third quarter of 2021, compared to RMB0.13 in the third quarter of 2020. Non-GAAP basic and diluted net loss per ADS were RMB0.54 in the third quarter of 2021, compared to non-GAAP basic and diluted net income of RMB0.01 per ADS in the third quarter of 2020.

As of September 30, 2021, we had cash and cash equivalents and restricted cash of RMB515.9million.

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

(Operator Instructions). Our first question comes from the line of Vicky Wei of Citi. Please go ahead.

(through translator) Good morning management, thanks for taking my question. My question is regarding to user spending and user growth. Under the challenging regulation environment and short macro control conditions, what is the impact to LIZHI's user growth and user spending? Thank you.

I will translate for Marco.

(through translator) The recent regulatory environment is getting tightened but we think it is beneficial to the long-term development of the entire industry, given more standardized digital content and operation mechanisms, especially for a mature Company like us we get more advantages.

In terms of products and operations, we are also actively monitoring the regulatory policy changes and earnestly optimizing and adjusting our products. These efforts enable us to meet compliance requirements while also providing better services for our users.

In terms of user spending in the third quarter, the overall user spending on our platforms decreased slightly, which was affected by some factors including the optimization of our operational strategies.

In the third quarter, we began to focus more on the content categories with higher potential for monetization and reduced the investment on those pre-recorded content with relatively lower long-term commercialization potential. And we focused more on the content categories with longer term commercialization potential.

In a short term, these adjustments may have temporary effects on certain user metrics, such as the overall user base. But in the long-run, we are confident in further increasing the paying user base through more precise operational and marketing strategies while maintaining a stable user spending level.

And we are confident it may further foster the top-line growth and improve the operational efficiency.

This is my answer, thank you.

Thank you.

Thank you for the questions. Next questions will come from the line of Vincent Yu of Needham & Co. Please go ahead.

(through translator) Thank you management for taking my questions. I have three questions. The first question is about can management share insights on our strategy on improving user paying ratio?

And second question is in terms of our overseas business, what's our current focus on product optimization? And how should we expect growth in the revenue contributions from this business in 2022?

And the third question, as we are seeing a weakness from user base can user roles, can management share more details on what we have done on product change side and content side causing such results? And what we should expect the trend in 2022?

Also we are seeing some - looks like we are seeing the revenue sharing to broadcasters has been declining and what we have done - and can you share more information on that end as well? Thank you.

I will translate for Mr. Zelong Li.

(through translator) With respect to the growth of paying ratio, we have two strategic priorities in the next stage. First of all, at the operating strategy level. We will focus on our audio entertainment business and improve user engagement through diverse promotional activities, including lowering the participation threshold of events and activities and enhancing ties between users and hosts.

As for pre-recorded segment, we will further sort out and exploit the core categories with strong monetization potential, better attract the content creators and users to interact in audio entertainment segment, so as to improve the user engagement and paying user conversion rate.

On the other hand, in terms of marketing strategy, we will also focus on categories with higher commercialization potential and optimizing the promotional model and materials.

We will execute on precise user acquisition strategy to reach core user groups with strong willingness and ability to pay, so as to increase the overall paying user base. We are confident that these tactics could effectively improve our overall paying ratio.

The second question is about the overseas business expansion, so our current focus, we want the round user experience as we constantly optimize the product functions and features to meet users' social demands, driving the organic user growth.

Also we have experienced a marked increase in user time spent and user engagement following the launch of new product iteration, including the launch of more innovative functions. In the near-term, we will continue to optimize multiple aspects of our products and our features, and pay close attention to key metrics such as users' interaction levels and time spent to lay more solid foundation for the long-term growth.

In the future, we will test waters with respect to the commercialization step-by-step at an appropriate timing. We expect the overall revenue growth in the short term will be mainly driven by audio entertainment business. But in the long-term, with a growing user base and stronger network impact, we believe the overseas business expansion could bring us more commercialization potential and build our second curve.

For the third question is about slowing growth on the user base side. So for that, is because - mainly because of our optimized strategies in the third quarter. So we made strategic adjustments to our content operation in domestic business' pre-recorded content segments.

Accordingly we choose to optimize our promotional strategy of targeting the content with more commercialization opportunities and we also reduce the marketing expenditures in the investments related to the pre-recorded content categories with weak or lower commercialization capabilities and lacked relevance to the audio entertainment business. It did have like, certain impacts on the overall user base in the short-term.

In the next year the commercialization of our audio entertainment business will continue to be the primary driver of our top-line growth. In the third quarter, although the total user growth slowed down from last year, our audio entertainment MAUs grew by 21% year-over-year, which provides growth potential for the commercialization of our audio entertainment business.

We believe that with our adjusted operating strategy and the refined promotional model we are targeting to improve the paying ratio to foster the topline growth. In addition, with the development of overseas business, we believe that the digital social networking business could also bring us more growth opportunities. Thank you. That concludes my answer.

Thank you for the questions ...

Thank you.

... as there are no further questions now, I would 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.

This concludes the conference call. You may now disconnect your lines. Thank you.