Good morning and good evening, ladies and gentlemen. Thank you, and welcome to DouYu International Holdings Limited, Second Quarter 2021 earnings conference call. At this time, all participants are in 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, Mr. Mingming Su, Chief Strategy Officer at DouYu. Please go ahead, sir.

Thank you. Hello, everyone. Welcome to our Second Quarter 2021 earnings call. This is Mingming Su, DouYu's Chief Strategy Officer. Joining us today is Mr. Shaojie Chen, Chairman and Chief Executive Officer, and Mr. Hao Cao, our Vice President of Finance. You can refer to our Second Quarter 2021 Financial results on our IR website at ir.douyu.com. You can also check a replay of this call when it becomes available in a few hours on our IR website. Before we start, please note that this call may contain forward-looking statements made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the Company's control which may cause actual results, performance, or achievements of the Company to be materially different from the results, performance, or expectations implied by these forward-looking statements. Our forward-looking statements are expressly qualified in their entirety by the cautionary statement, risk factors, and details of the Company’s filing with the SEC. The Company undertakes no duty to revise or update any forward-looking statements for events after the date of this conference call. I will now speak on behalf of our Chairman and CEO, Ms. Shaojie Chen. During the Second Quarter of 2021, our overall performance remained stable as we continued to upgrade our business system. Total net revenues for the quarter reached RMB 2.34 billion, while the quarterly average paying user count reached 7.2 million. During the Second Quarter, our average mobile MAU increased by 3.9% year-over-year to 60.7 million. MAU growth was mainly driven by two factors. Firstly, we've attracted new eSports users and galvanized the return of older users through eSports tournaments, notably the World Cup, which included major events such as our LTL Spring Grand Final 2021, and the KPL Spring Grand Final 2021. Secondly, we've refined our exchange by enhancing our collaboration with eight games, including AOL while exploring partnerships with additional game developers to introduce small, mid, and long-tail games and to strengthen operations for new games. So Naraka: Bladepoint, a major title launched in the quarter, benefited from our collaboration with skin developers to create promotional content and events. This effort has gradually attracted high-quality players to our platform. Now, turning to our content updates. During the Quarter, we continued to expand our content ecosystem, both upstream and downstream, to cover the entire eSports industry value chain. We also wrapped up our efforts to construct a comprehensive game content library focusing on various game genres. By broadcasting and self-producing eSports tournaments and events in various formats, we continued to develop more high-quality eSports content. At the same time, we also continued to actively sponsor and invest in top eSports teams. During the quarter, we cut over eSports tournaments and self-produced more than 80 high-quality eSports events. Among them, we leveraged the LOL pre-season challenger match to actively recruit new high-quality streamers and organized matches between streamers and teams to engage the content on our platform during the off-season for premier eSports events. In addition, the IPO summer 2021 tournament, which is the premier LOL professional tournament in China, kicked off in June. We predict that the tournament will provide complete live streaming coverage of the event from start to finish through our platform in consort with other related sales productivity programs. For our PLS1 tournament, the premier level professional season for Peace Keeper, we rolled out promotional events such as live watch parties for tournament matches anchored by popular live streamers to further improve user engagement. Meanwhile, we continued to fuel the development of our content library by introducing additional game developers to enhance our content offerings across more genres. Further, we utilized eSports tournaments to engage coverage for our flagship games. During the Quarter, we hosted over 20 tournaments for games of various genres, including Honor of Kings and Peace Keeper. Additionally, we utilized the IP of popular streamers to create more high-quality PGC content and meet the diverse content demands of users. Finally, we further enhanced user engagement based on heightened in-game experiences by delivering content related to real-time advice from streamers and high-ranking professionals on matchmaking, in-game equipment selection, and strategy. We also implemented systematic marketing programs for new and long-tail games. This includes a multi-step process that involves tailored promotional content delivered at events, based on individual game lifecycle stages. We began cooperating with game developers prior to the launch of beta testing for new games to foster anticipation and excitement among targeted consumers. We utilize the influence of our top streamers to enhance visibility for these new games. Moreover, by recruiting new streamers for the games, we can swiftly fill the content gap following the event of a game launch. Furthermore, we actively cooperated with game developers to launch a series of events to foster development of engaging video content. Through the proactive marketing of this content, we can attract more potential players. Additionally, our platform generates game-related topics, introduces customized programs, and content to promote games while enabling player interaction with key opinion leaders (KOLs), all of which helps us attract new users and enhance user experience. Now, turning to monetization. In the Second Quarter, our quarterly paying users were 7.2 million with an ARPPU of RMB 303. The slight year-over-year decrease in ARPPU was primarily due to the abnormally high user activity and ARPPU during the Second Quarter of 2020 related to pandemic-induced stay-at-home orders. During the Quarter, user behavior normalized to pre-pandemic levels. Through our operating strategy and execution, we continue to focus on improvements in user engagement and paying user consumption. Going forward, we will work to further adjust our products and enhance overall paid user scenarios to achieve healthy ARPPU growth rates. Finally, we remain committed to refining our operations across different segments, which should facilitate further growth and efficiency. We are making good progress on the R&D front. During the quarter, we launched AV1 decoding technology, becoming the first in China to support AV1 decoding in live streaming. Compared with our previous decoding technology, AV1 has lower bandwidth costs and has eliminated lag while maintaining the same video quality. Our platform upgrades revolve around the evolution of our game content. Starting from live streaming, we have expanded into producing video and graphic content, with our popular and new games as a primary objective. We have forged an integrated gaming segment that combines live streaming, video, visual graphics, interactive communities, and in-game gifts. We have also adapted our platform's search functions to support these multiple forms of content. By providing support for sessions and accessing historical live streams, videos, and graphic content on our platform, we can now better satisfy users' search queries for game content. We also continued to fortify our foothold overseas. During the quarter, we increased our investment in overseas markets. In particular, I would like to highlight our achievements in Japan. According to the latest app earnings statistics, we have become one of the mainstream video games and live streaming apps in Japan, maintaining an industry-leading user base in the country. In terms of monetization, we will continue to strengthen the monetization capabilities of our platform to further solidify our market position in Japan while showcasing our competitive skills in that market. In summary, during the Second Quarter of 2021, we leveraged our platform advantages to achieve success across numerous forms. We expanded our collaboration with game developers while providing gamers and viewers with comprehensive content combining live streaming, videos, graphics, and interactive communities. Looking ahead, we plan to continue executing our product strategy, enhancing our streaming capabilities, and focusing on monetization to improve our overall financial performance. With that, I will now turn the call to our Vice President of Finance, Mr. Hao Cao, to go through the details of our financial performance in the second quarter.

Thank you, Mingming. Hello, everyone. Total net revenues in the Second Quarter of 2021 were RMB 2.34 billion. Live streaming revenues were RMB 2.18 billion compared with RMB 2.32 billion in the same period of 2020. Advertising and other revenues were RMB 158.7 million compared with RMB 188.3 million in the same period of 2020. The year-over-year decrease in live-streaming revenues was mostly due to the abnormally high user activity in the prior-year period caused by stay-at-home orders during the pandemic. In the Second Quarter of this year, as the pandemic was gradually brought under control in China, user behavior largely normalized, reverting to pre-pandemic levels. This decline was partially offset by our efforts to improve spending by our core paying users.

The year-over-year decline in advertising and other revenues was mainly due to the fact that game advertisers increased their marketing budgets in the Second Quarter of last year due to the pandemic and related stay-at-home measures. As a result, overall advertising revenue in the Second Quarter of last year reached a relatively high level, while this quarter, as the pandemic continued to be controlled in China, the number of hit games featured on platforms decreased, leading to a decline in game-related advertising revenue.

Cost of revenues in the second quarter of 2021 increased by 2.3% to RMB 2.03 billion from RMB 1.99 billion in the same period of 2020. More specifically, revenue sharing fees and content costs increased by 3% to RMB 1.81 billion from RMB 1.75 billion in the same period of 2020. This increase was primarily due to increased investment in overseas streamers as we continue to expand our overseas market. Higher license costs were attributed to more investment in broadcasting rights for eSports tournaments and additional investment in proprietary content production. Bandwidth costs in the second quarter of 2021 decreased by 3.9% to RMB 161.8 million from RMB 168.4 million in the same period of 2020. This decrease was mainly due to the successful execution of our ongoing technology upgrades, which led to higher bandwidth efficiency and a lower bandwidth usage cost during the period. Gross profit in the second quarter of 2021 was RMB 306.5 million compared with RMB 522.9 million in the same period of 2020. Gross margin in the second quarter of 2021 was 13.1% compared with 20.8% in the same period of 2020. This decrease was primarily due to falling revenues, resulting in revenue sharing fees and content costs increasing as a percentage of total net revenues. Sales and marketing expenses in the second quarter of 2021 were RMB 295 million compared with RMB 142.1 million in the same period of 2020. This increase was mainly attributable to increased costs from utilizing additional promotional channels for user acquisition and continued spending on both official and self-produced live eSport tournaments and corresponding sponsorship fees as the pandemic was gradually brought under control in China. Research and development expenses in the Second Quarter of 2021 were RMB 123 million, which represented an increase of 29.6% from RMB 9.9 million in the same period of 2020. This increase was primarily due to additional investments in technical personnel as we continued our overhead expansion and technology infrastructure upgrades to enhance user experience. General and other administrative expenses in the second quarter of 2021 were RMB 102.6 million compared with RMB 79.5 million in the same period of 2020, primarily due to an increase in professional service fees during the quarter. Adjusted operating loss in the second quarter of 2021, which excludes share-based compensation expenses, was RMB 165.1 million compared with an adjusted operating income of RMB 272.7 million in the same period of 2020. Net loss in the second quarter of 2021 was RMB 181.7 million compared with net income of RMB 319.3 million in the same period of 2020. Adjusted net loss in the second quarter of 2021, which excludes share-based compensation expenses, share of income from equity investments, and impairment loss of investments, was RMB 145.1 million compared with an adjusted net income of RMB 322.9 million in the same period of 2020. For the second quarter of 2021, basic and diluted net loss per ADS were RMB 0.45 each. While adjusted basic and diluted net loss per ADS were RMB 0.35 each. Going forward, we will continue exploring new methods of improving our monetization capability and efficiency. Additionally, as we continue to grow, we will focus on further utilizing our operational leverage to build a sustainable environment for our platform. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

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

Thanks, management, for taking my question. I have two questions here. First is, can you give us some more color on new games that had good performance in the second quarter? And if we look into the second half, are there any new games that we can expect? Secondly, I want to hear your opinion on traditional users of those games—what is the trend of those games in terms of time spent? How do we look at the trend of the past traditional games in the future? Thank you.

Okay. Let me address these two questions. According to our platform data, new games such as Lara Croft and CHG have performed well since the second quarter of this year. From June to July, we noticed that overall live streaming and user engagement for Lara Croft: Slide Point increased by more than 200%. We have continued to generate PGC video and build our content ecosystem for this new game. Such efforts have played an important role in promoting these games and elevating our platform. Looking ahead to the launch schedule for games in the second half of this year, we expect new catalysts for the gaming market to include LL mobile, Pokémon Unite, and Justice Online. Prior to the launch of new games, we plan to cooperate with game developers to bolster anticipation and excitement among targeted consumers and deliver sufficient, rich game-related content for gamers and users on our platform. Regarding traditional games, the majority of our top 10 platform games are from traditional formats, such as mobile and FPS games, which are characterized by longer playtimes and high entertainment value. According to our platform data, the ranking of our top 10 game channels has remained largely consistent over several quarters. The data also suggests that user engagement time for non-top 10 games has gradually increased compared to the same period a year ago. We believe the primary reason behind this trend is the strategic upgrade of our platform. As we transform into a P2P platform for our game-related live streaming content, we are also focusing more on non-traditional games this year. We are making distinctive efforts to develop more comprehensive plans and quantitative content for game promotion through live streaming, videos, and graphic content, as well as utilizing our user community. For instance, in terms of live streaming, we leverage our top streamers to foster anticipation and excitement among targeted consumers prior to the launch of new games. By working with game developers, we can create multiple PGC videos and increase our number of promotional channels. For user engagement, we can invite KOLs for real-time interactions with our users, thus generating more hot topics and engaging content. As we continue to execute this product strategy, we expect that user engagement time on non-eSports game segments will increase, and our platform content will diversify in the long run. Thank you.

The next question comes from Lee Wen Zhang with China Renaissance. Please go ahead.

Thanks for taking my question. The first question is regarding the self-produced tournament. In the prepared remarks, you mentioned that there were over 80 self-produced tournaments. We also note that this year there has been an upward trend in pricing and licensing of tournaments. How do you plan to manage self-produced content in order to tackle these increasing licensing costs? Similarly, regarding new game preparation, you mentioned a few in the previous question, for example, League of Legends mobile. What is the latest progress on streamer recruitment, and how will you build up top-tier streamers for the new game preparation?

This year, we have witnessed an increase in licensing costs for our eSports tournaments' broadcasting rights across the industry. However, we believe that the licensing costs for broadcasting rights of major eSports tournaments will remain relatively stable over the next couple of years. My expectation is based on our observation of current market conditions and the fact that the eSports industry has reached a mature stage of development. Furthermore, self-produced tournament content has been an important part of our content strategy. Self-produced tournaments such as the Golden Brand tournament and the DNS All-Stars have yielded outstanding results on our platform, especially the DouYu Golden Brand Tournament, which has been held for around 11 seasons and has become one of our most significant brands. Going forward, we will continue to bolster the organization of our own eSports events and focus more on generating PGC content for non-eSports games. We are confident that we will leverage our considerable number of quality streamers and video creators to execute this strategy.

Next question, please.

The next question comes from Alex Fung with Morgan Stanley. Please go ahead.

I had two questions. First, regarding the revenue share and content costs trend in the Second Quarter, including different components such as sign-up bonuses, revenue share, and content procurement costs, how should we forecast this segment cost in the future given that we observe a slight revenue decline? My second question is related to the PC MAU number. This time, we have not disclosed the PC MAU number. What is the reason behind this? And if we remove duplicated users, how many PC users do we actually have? Thank you very much.

Regarding the first question on revenue sharing costs, we will maintain our 50-50 revenue sharing policy for our platform and streamers. However, during promotional periods, we offer specific incentives to streamers. Therefore, while the overall revenue share ratio may fluctuate slightly quarter-over-quarter, it will generally remain stable. The increase in content costs in the Second Quarter of 2021 was primarily linked to higher revenue-sharing costs and increased investment in self-produced programs. The rise in licensing costs was due to more investment in eSports tournament broadcasting across the industry, and starting this year, we expect slightly higher licensing costs in the second half of this year. In terms of our PC MAU, they have remained relatively stable within the range of 119 to 130 million. Since our IPO in July 2019, quarterly figures have primarily been driven by collaborations with PC game developers, and the revenue contribution from live streaming on our PC portal has stabilized over the past several quarters. In the long run, we expect our mobile portal to be the primary driver for growth and revenue generation. As a result, we decided not to disclose our PC MAU starting from this quarter. With user growth stagnating, non-eSports blockbuster games remain relatively under-penetrated, and we believe there is still ample opportunity in the mobile market. In the future, we will deepen collaborations with non-eSports game developers to better understand user spending habits and create a more welcoming content ecosystem for our users.

The next question comes from Daniel Chen with JP Morgan. Please go ahead.

I'll translate myself. My first question is on the revenue side. We see that the Second Quarter revenue has declined on a year-over-year basis. Could management provide more detail on the rationale behind this? And what's the trend for paying users and ARPPU in the Second Half of this year for live-streaming? Secondly, regarding cash, as of the Second Quarter of this year, we see that we still have over $1 billion in net cash. How are we planning to use this cash in the future?

The year-over-year decrease in revenues was mostly due to abnormally high user activities in the prior-year period caused by stay-at-home orders during the pandemic. In the Second Half of this year, to further stimulate our paying users' willingness to engage, we will continue to focus on monetization activities. Through our continuous efforts to improve the engagement and consumption of our existing paying users, we hope to innovate further. Regarding our cash on hand, we are focused on effectively using our strong cash balance. We will prioritize strategic cash distribution to operational initiatives that drive revenue growth, including exploring content upgrades, developing new business elements, and continuing to invest in new growth drivers. For example, at the end of last year, we rolled out a strategy to enhance our platform's content. We also increased investments in non-eSport game segments to attract new users. Finally, we escalated R&D spending to explore new monetization models, which aligns with our goal of making games a significant monetization channel.

Thanks.

The next question comes from Thomas Chong with Jefferies. Please go ahead.

Thanks, management, for taking my question. I have a question relating to the merger and acquisition deal cancellation. When should we expect the cancellation of the deal to affect our operations? Can management comment on our business strategy as an independent platform? The second question is related to the competitive landscape. How should we think about competition? Will it become more intense after the merger is canceled?

Thank you for your question. With the rapid development of the domestic internet industry over the past few years, authorities have gradually improved industry policies and regulations. We believe that the anti-trust regulations align with the government's goal of promoting positive and fair competition within the internet industry, to encourage a level playing field. We fully respect this regulatory decision and will continue to cooperate with the requirements and operate in compliance with the law. We have been an independently operated and managed company since our inception. As a result, we don't expect the decision on our proposed merger to materially impact our operational and financial performance. As an independently-operated company, we will continue to pursue steady growth and expand our content ecosystem on both upstream and downstream aspects of the eSports value chain. In addition to maintaining our leadership in traditional eSports live-streaming, we will continue to strengthen our operations in non-eSports segments to accelerate our growth and build a game-centric content ecosystem on our platform. Regarding the competitive landscape, the situation in the gaming live-streaming industry has not changed significantly since the Second Quarter of 2021. Since streamers are barred from moving between platforms, competition in the industry remains healthy. Additionally, our premium top and mid-tier streamers provide us with a strong competitive advantage in terms of both content and the number of quality streamers available. This enables us to maintain our industry leadership continuously. Our focus has shifted toward leveraging our unique advantages to create more game-centric content and establish communities around this content to attract new users. We are actively cooperating with traditional eSports game developers and are expanding our collaborations with developers of non-eSports games. We are involved in covering the entire industry value chain and reinforcing our leading position as a game-centric community platform in China.

Thank you.

The next question comes from Richie Zhang with HSBC. Please go ahead.

Thank you for taking my questions. The first one is, the sales and marketing expense was growing favorably in the Second Quarter. What is the reason for that and what are the major user acquisition channels for us? How will traffic acquisition costs trend in the future? The second question is, can you share more details on our expansion progress in the Japanese market? When do we expect monetization to kick in?

Marketing expenses include steps such as promotion costs in China, eSports teams' sponsorship fees, and expenses for online and offline activities. In the Second Quarter of 2021, increased sales and marketing expenses were primarily due to our promotional activities for new product functions and an increased marketing budget to attract new users, which is in line with the development of our new business. Our primary promotional channels for user acquisition are those associated with advertising agencies, as well as additional news feed and content libraries. We have a positive outlook on the development of the eSports industry in the normal run, and we will continue to invest in eSports-related activities and sponsorships going forward. Meanwhile, we will upgrade our product features to improve the efficiency of our traffic conversion. Therefore, in the future, we expect our sales and marketing expenses to remain at a relatively high level.

Let me address your second question. During the Second Quarter of 2021, we continued to invest and explore opportunities in the Japanese market.