DouYu International Holdings Ltd Q4 FY2020 Earnings Call

Good morning, and good evening, ladies and gentlemen. Thank you, and welcome to DouYu International Holdings Limited's Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be hosting a question-and-answer session after management's prepared remarks. I will now turn the call over to the first speaker today, Ms. Mao Mao, Vice President of Capital Markets of DouYu. Please go ahead, ma'am.

Thank you. Hello, everyone. Welcome to our Fourth Quarter and Full Year 2020 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 fourth quarter and full year 2020 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 site.

Thank you, Mao Mao. Hello, everyone. Overall, total revenues in the fourth quarter of 2020 increased by 10% year-over-year to RMB 2.27 billion, while total revenue in the full year of 2020 increased by 31.8% year-over-year to RMB 9.6 billion. Additionally, in the full year of 2020, adjusted net income was RMB 541.6 million, and adjusted net margin reached 5.6%, implying a net increase of approximately 80 basis points from the prior year. Total net revenues in the fourth quarter of 2020 increased by 10% year-over-year to RMB 2.27 billion, with around 91.3% of total revenues generated from live streaming and the remaining portion generated from advertising and others. Live streaming revenues in the fourth quarter of 2020 increased by 9.4% to RMB 2.07 billion from RMB 1.89 billion in the same period of 2019. This increase was primarily attributable to our platform's improved user paying experience, which continues to be driven by our ongoing product refinement efforts as well as the changes in user paying habits resulting from our increased application of platform paying scenarios. As a result, paying users in the fourth quarter of 2019 increased to 7.6 million from 7.3 million in the same period of 2019. In addition, the in-house diversification of our content ecosystem helped to improve the monetization efficiency of both game and non-game segments on the platform. As such, our ARPPU increased to RMB 273 in the fourth quarter of 2020 from RMB 261 in the same period of last year.

Thank you. We will now begin the question-and-answer session. The first question comes from Lei Zhang from Bank of America. Please go ahead.

My question mainly regards the merger deal with Huya. Do we still maintain your timeline to complete the deal by the first half of this year? Secondly, regarding the antitrust regulation about the Internet space, do you see any impact on our major deal yet?

Okay. Thank you for your question. Currently, the potential merger between DouYu and Huya is still on track. Our teams are efficiently collaborating with third-party entities and working around the clock. However, the exact timing of the closing also depends on the approval process by the SEC and the relevant domestic regulators. As such, we are not able to share the closing date for now. As for your second question, authorities have gradually improved the industry policies and the regulations following the rapid development of the domestic Internet industry over the past few years. We can see that the regulators have issued revised antitrust guidelines with the goal of promoting positive and fair competition among Internet industry participants. So relative to the guidelines, we expect a level playing field across the industry, which will also support DouYu's long-term development. For the entire pan-entertainment segment, we observe that industry competition is still relatively fierce at this stage, while the overall competitive landscape continues to change. We believe that DouYu has the potential to further improve its user scale and revenue performance. One of the key goals of our merger with Huya is to further integrate the high-quality resources of the two platforms, improving our operational efficiency and working with Tencent to jointly expand our service offerings along the digital value chain as well as in the online pan-entertainment segment. This will increase the overall value of the combined platform and unlock greater growth potential in the future.

The next question comes from Daniel Chen from JPMorgan. Please go ahead.

I will translate myself. So my question is related to the competition landscape. Could management give us some update on the competition landscape since the fourth quarter of this year in the game streaming industry? Moreover, after the potential merger with Huya, what kind of changes are we going to see in the market in terms of competition? Also, as we have already signed a merger agreement, what kind of important procedures are we going to see in the future before the transaction happens?

Regarding your question on the competition, we believe that the industry's competitive landscape has not changed significantly since the fourth quarter of last year. As the leading game-centric live streaming platform, we will continue to build our game-centric content ecosystem and explore other game-related areas, such as video and community segments, on top of our live streaming content. As short-form media platforms enter the game live streaming market, we have seen both new traffic and customer applications increase, which has also helped to raise the ceiling of the entire game live streaming market. We took this opportunity and launched version 7.0 of our app at the end of last year. With the updated and refined video and community content, we can now provide more diversified content to our users. From a competition perspective, we believe that the industry competition in the short run mainly revolves around the refinement of segment operations, the high-quality content, and the diversification of monetization as well as the rapid deployment of blockbuster games. In the long run, we expect that competition will focus on the rapid product upgrade and innovation of content forms, such as video entertainment content, the development of communities, and the integration of resources down the industry value chain. We have been focused on building a game-centric content platform since inception, and we have clear advantages in terms of professional content creation and accumulation, vertical game user base formation, and cultivation of a professional eSports content ecosystem. Now we have created stronger content barriers. As a result, we have a clear leading advantage in terms of attracting and maintaining the core game user base. Looking forward, we believe that with the lifted ceiling of the entire industry, we will take advantage of the demand for content and management strength to further expand our user coverage and user traffic. After the merger, we expect more in-depth commercial cooperation between the two platforms as well as with Tencent, which we believe will further enhance the positioning of the combined entity. As Mr. Su just responded, currently, the merger is still ongoing, and we look forward to our next steps, including getting approval from the SEC and the relevant domestic regulators. For now, we cannot really tell the timing for the deal.

The next question is from Alex Liu from China Renaissance. Please go ahead.

I'll translate myself. I noticed that since the Company has made a notable investment in short video and the virtual community in the past few months. Could management share more insights there? The second question is on the League of Legends Championship. What are the major takeaways and observations from that event? Finally, what are the major revenue drivers for World of War?

Regarding your first question, we are currently developing the video and community segments on top of our live streaming product content and expect the three avenues to become the key pillars for our integrated game-centric content ecosystem. For live streaming, we will continue to produce high-quality, informative content. In addition to our existing games, we will also closely monitor any new blockbuster games in the market, explore new multiple games attractive to our users, develop our own eSports events and programs, and produce more content related to official interest groups. Secondly, regarding the video business, we have already completed the first phase of infrastructure development and we have already launched version 7.0 of our app with updated video and community segments at the end of last year. We have also introduced a video content creator initiative to accelerate UGC generation on our platform. Together with our PGC, we have established an extensive content library to satisfy users' diverse demand. Additionally, for our community business, we upgraded the community segment based on forums and created interest groups focusing on game discovery, introduction, and discussion.

Let me respond to your second and third questions. The second question is about the active tournament. As we know, the League of Legends World Championship is the premier official annual tournament for League of Legends and has always attracted a larger number of viewers. In the first half of 2020, many large-scale offline eSports tournaments were postponed or canceled because of the pandemic, making the tournament one of the few global eSports events of 2020. Organized in Shanghai, the tournament attracted strong domestic viewership and was widely followed by Internet users in China. League of Legends has always been a strong segment on DouYu's platform. In fact, we have a large number of well-known streamers associated with DouYu and a marked streaming and content system for this segment. Additionally, we signed contracts with many famous domestic and international League of Legends eSports teams, such as Arteezy, CDG, TES, and DWG. Combined with this strength, our exclusive partnerships with multiple social platforms make us the most popular game live streaming platform for the League of Legends Championship, which saw record-high operating metrics during the tournament. This also helped us attract more high-quality user traffic to cement our platform as the go-to destination for watching League of Legends tournaments. For your third question, regarding how to increase revenue, we will continue to direct and refine our monetization products, tailoring these product features based on deeper user profiles, improve existing users' ARPPU, and cultivate new users' paying habits to further improve daily revenue contribution and the paying ratio. To maintain sustainable revenue growth, we plan to leverage our platform-wide events and most scale monetization events to raise our penetration rate of paying users and ARPPU. Under our game-centric content ecosystem, we will further diversify our content offerings and increase the revenue contribution of our non-game segments by channeling user traffic to segments with relatively high monetization efficiency, such as entertainment and shows.

The next question is from Feiya Zhao from Haitong International. Please go ahead.

My first question is, what is the revenue split by game and non-game content? And what is our outlook for ARPPU and the number of paying users in 2021? My second question is, could you please give us the breakdown of the content cost in the third quarter and the trend of the signing bonus for the broadcasters in the past few quarters? How should we think about returns going forward?

Let me answer the first question. We expect our game segment to continue to be the major live streaming revenue contributor to our platform. The game segment has demonstrated strong growth potential in both ARPPU and total paying users. Revenue generated from our games segment is expected to account for 50% of our total revenue in 2021, and we plan to increase this percentage going forward. For the non-game segment, we aim to increase the revenue contribution by strategically allocating traffic between segments. As we continue to focus on platform-wide monetization events and increase the penetration of small-scale monetization events, we will explore more scenarios to cultivate users' paying habits and increase their willingness to pay. Both our total paying users and ARPPU will further increase.

Regarding your question on the signing bonus, the quarter-over-quarter increase of streamer signing bonuses during the fourth quarter was due to two reasons. First, we continued to recruit new streamers for newly launched game segments to maintain high-quality content offerings on our platform. Second, we increased our investment in foreign streamers in the overseas market. Looking ahead, the signing bonus will increase at a stable rate due to our rapid international expansion and the rising signing bonuses of overseas streamers and house streamers from new game titles.

Our last question comes from Thomas Chong from Jefferies. Please go ahead.

I have a question regarding the bandwidth cost. Can management comment on the sequential trend in Q4 as well as how we should think about the drivers of the bandwidth cost going forward? On the other hand, can you also comment on the sequential change in sales and marketing expenses and the drivers for sales and marketing going forward?

With respect to the bandwidth cost, in the fourth quarter, bandwidth costs increased slightly because of intensive tournaments and more frequent peak usage periods. Apart from that, we provided users with more high-quality live streaming video options, such as 4K high-definition video. We expect bandwidth costs in 2021 to increase along with the rise in users. However, bandwidth costs as a percentage of total revenue will continue to decrease. The second question is about sales and marketing expenses. Sales and marketing expenses, excluding share-based compensation, mainly include staff salaries and other related expenses, channel promotion costs, sponsorship fees for our eSports teams, and expenses for offline and online events. In the fourth quarter of 2020, sales and marketing expenses, excluding share-based compensation, increased on a sequential basis. This increase was due to more eSports tournaments resulting in increased marketing expenses and higher prizes for our self-organized eSports tournaments. We are quite positive about the development of the eSports industry in the long run, and we will continue to increase our investments in eSports-related activities and in our team sponsorships going forward. Meanwhile, we believe our user conversion will increase because of the updated features of the platform, and we plan to bring our channel promotions in-house. Therefore, in the future, the absolute value of our sales and marketing expenses will increase, while as a percentage of our total revenue, sales and marketing expenses will continue to optimize.

There are no more questions in the queue. This concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Thank you for joining us today. If you have any further questions, please feel free to contact us or visit our IR site. Thank you, and have a good day.

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