Earnings Call Transcript - DOYU Q2 2020

Operator, Operator

Good morning and good evening, ladies and gentlemen. Thank you and welcome to DouYu International Holdings Limited's Second Quarter 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'd now like to turn the call over to the first speaker today, Ms. Mao Mao, Investor Relations at DouYu. Please go ahead ma'am.

Mao Mao, Investor Relations

Thank you, operator. Hello everyone. Welcome to our second quarter 2020 earnings call. Joining us today are Mr. Shaojie Chen, Chairman and CEO; Ms. Mingming Su, Chief Strategy Officer; and Mr. Hao Cao, Vice President of Branding. You can refer to our second quarter of 2020 financial results on our IR website. 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 Safe Harbor provision for 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. All forward-looking statements are expressly qualified in their entirety by the cautionary statements risk factors and details of the company's filings with the SEC. The company undertakes no duty to revise or update any forward-looking statements for selected events or circumstances after the date of this conference call. Now I will speak on behalf of our Chairman and CEO, Mr. Shaojie Chen. This evening we issued a press release, which was furnished to the Securities and Exchange Commission under the Form 6-K reporting that we have received a non-binding proposal letter from Tencent Holdings Limited. You can see it in the release in the Investor Relations section of our IR website. According to the proposal letter, Tencent proposed to DouYu and HUYA Inc. to enter into a stock-for-stock merger to be effected pursuant to applicable laws as a result of which Huya or its subsidiary would acquire each outstanding ordinary share of DouYu, including ordinary shares represented by American depository shares in exchange for a to-be-agreed number of newly issued Class A ordinary shares of Huya. The Board has just received the letter and no decision has been made of any kind with respect to the proposal transaction. Our Board will continue to assess the transaction. There is no assurance that any definitive offer will be made that any agreement will be executed or that this or any other transaction will be approved or consummated. The company does not undertake any obligation to provide any update with respect to this or any other transaction except as required under applicable law. Additional information will be provided if and when appropriate. Now I will turn back to our second quarter performance. We concluded the second quarter of 2020 with solid financial and operational results as both our total net revenue and profitability reached record highs.

Shaojie Chen, Chairman and CEO

We issued a press release stating that our total net revenues increased by 33.9% year-over-year to RMB2.51 billion. Additionally, gross profit increased by 73.7% year-over-year to RMB522.9 million, while gross margin expanded to 20.8%. Meanwhile, net income was RMB319.3 million, representing a net margin of 12.7%. Non-GAAP net income increased to RMB322.9 million, representing a non-GAAP net margin of 12.9%. And ARPPU increased by 19.7% year-over-year to RMB300.06. Although the reduction of people's regular work and school schedules led to short-term pressure on our user traffic growth, our average mobile MAU count maintained its rapid growth trajectory in the second quarter, increasing by 15.4% year-over-year to 58.4 million. This steady improvement in operational results was mainly due to our promotion of new game live streaming content, our collaboration with celebrities, and cultivation of streamers with high-growth potential as well as our production of superior eSport-centric live streaming content and events. Since our company's inception, we have firmly believed that high-quality game live streaming content is a fundamental growth driver for both user retention and user engagement. As such, we maintained our commitment to augmenting our user value proposition in the quarter by enriching our eSports content and expanding our non-game segment content offering. For example, we continued to broadcast and produce popular eSports tournaments and deepened our collaboration with leading eSports streamers. Such efforts helped to grow our supply of premium eSports content and thus to further bolster our industry leadership. In addition, through our exploration of different non-game content segments, we witnessed the user traffic growth of both our sports and live content categories accelerate in the period. Our expansion both upstream and downstream in the value chain also yielded ample results during the quarter. On the gaming front, we successfully broadcast more than 50 large-scale eSports tournaments, as we continue to deepen our collaboration with leading game developers and publishers such as Tencent in this quarter. For our broadcast of KPL, we worked hand-in-hand with the Honor of Kings project team to develop a new commentary platform with streamer commentary broadcast model. This innovative model enables users to enter into the live streaming room of their favorite platform streamer to watch the streamers converse and listen to their commentary during the event, which proved to be quite appealing in the period, helping us further enhance our platform stickiness and streamer-user relationships. Going forward, we plan to accelerate our growth trajectory by implementing a three-pronged content strategy. First and foremost, we will continue to generate high-quality eSports content, including eSports-related game videos and tournament-centric content through in-house production and joint development with external partners. In addition, we plan to actively deploy and refine new eSports-related business models such as cloud gaming. We will also continue to optimize our systems for streamer training and recruitment, so that we can capitalize on those opportunities that emerge from new blockbuster game launches, deepen our market penetration, and accelerate our mobile MAU user growth and conversion.

Hao Cao, Vice President of Finance

Thank you, Emma. Hello everyone. I'm pleased to announce that our total revenues in the second quarter of 2020 continued to grow, increasing by 33.9% to RMB 2.51 billion from RMB 1.87 billion in the same period of 2019 and exceeding the high-end of our previous guidance range. In addition, during the second quarter of 2020, gross margin expanded to 20.8% from 16.1% in the same period of 2019. Net income increased to RMB 319.3 million from RMB 23.2 million in the same period of 2019. And adjusted net income increased to RMB 322.9 million from RMB 52.6 million in the same period of 2019. Now please allow me to provide you with some more details regarding our key financial metrics. Total net revenues in the second quarter of 2020 increased by 33.9% year-over-year to RMB 2.51 billion with RMB 2.32 billion in live streaming revenues and RMB 108.3 million in advertising and other revenues. Live streaming revenues in the second quarter of 2020 increased by 35.8% to RMB 2.32 billion from RMB 1.71 billion in the same period of 2019. This increase was primarily attributable to the optimization of our platform's interactive features, as well as our continuous refinement of event mechanisms, both of which helped to further cultivate users' paying habits. These initiatives helped to increase both user-streamer interactions and user payment frequencies on the platform, especially for our game segment. As a result, our paying users in the second quarter of 2020 increased by 13.4% to 7.6 million from 6.7 million in the same period of last year. Advertising and other revenues in the second quarter of 2020 increased by 14.6% to RMB 188.3 million from RMB 164.4 million in the same period of 2019. This increase was mainly driven by the ongoing growth of our brand recognition and the corresponding increase in demand for integrated streamer promotion advertising. Cost of revenues in the second quarter of 2020 increased by 26.3% to RMB 1.99 billion from RMB 1.57 billion in the same period of 2019. More specifically, revenue-sharing fees and content costs in the second quarter of 2020 increased by 32.3% to RMB 1.75 billion. The increase in revenue-sharing fees and content costs can be generally explained by the following drivers: during the quarter, our revenue-sharing fees increased, which was largely in line with the increases in total net revenues. Additionally, we enriched our platform's eSports-related content while continuing to advance our expansion initiatives in Japan. Furthermore, we increased our investment in tournament-related videos and in-house content production. Finally, costs in the second quarter of 2020 increased by 9.8% to RMB 168.4 million from RMB 153.3 million in the same period of 2019. The increases to bandwidth costs were mainly driven by increases in mobile user growth and total user engagement, as well as our ongoing efforts to improve the viewing experience of our users. Gross profit in the second quarter of 2020 increased by 73.7% to RMB 522.9 million from RMB 301.1 million in the same period of 2019. Gross margin in the second quarter of 2020 expanded to 20.8% from 16.1% in the same period of 2019. Such expansion was mainly driven by our monetization capabilities as well as our increased economies of scale. Looking ahead, we remain focused on improving our monetization capabilities and operating efficiencies while implementing investments to continue upgrading our user experience, diversifying our platform offerings, and expanding our market share. We expect our total net revenues for the third quarter of 2020 to be in the range of RMB 2.64 billion to RMB 2.68 billion. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Operator, Operator

We will now begin the question-and-answer session. [Operator Instructions] First question comes from Lei Zhang, Bank of America. Please go ahead.

Lei Zhang, Analyst

Thanks management for taking my questions and congrats on the strong results. My first question is regarding the M&A proposal announced today. Could management share with us your view on this? And secondly, can you give us an update on your current collaboration with Tencent in the gaming area? What are the major projects we have with Tencent now? And do we expect any further synergy or changes in the future? Thank you.

Shaojie Chen, Chairman and CEO

Thanks for your question. I will help translate. As discussed, our Board has now had the chance to review and reevaluate the proposal letter in detail. We have yet to make any decision on the proposal transaction, so please refer to our press release and SEC filings for the details related to the transaction. In terms of the second question, game live streaming is an important part of Tencent's strategy, which is advantageous for our developments going forward. We have maintained a close collaborative relationship with Tencent's live streaming middle office and multiple projects. Currently, we are discussing the implementation of initiatives regarding data exchange and selling our platform engine portal inside of games with Tencent. We believe this will significantly help to improve our mobile traffic and market penetration rate in the future.

Operator, Operator

Thank you. The next question comes from Yiwen Zhang of Citigroup. Please go ahead.

Yiwen Zhang, Analyst

Thanks management for taking my question. After the resumption of work and school, we still see sequential MAU growth on both PC and the mobile end. From our internal data, do we see any change in user behavior? Thank you.

Shaojie Chen, Chairman and CEO

Thanks for your question. I will help translate. Our user behavior is basically consistent with the trend over the past few quarters, which shows our high user signing. In the second quarter, the average net month active user retention rate remains stable at about 75%, which is consistent compared to the previous quarter. Meanwhile, our user behavior data indicates that with the increasing number of years users spend on our platform, their average monthly time spent continues to increase. This growth curve remains consistent across users who join us at different times. We are gradually becoming high quality and also have loyal users on our platform, which has not changed compared to previous quarters.

Operator, Operator

Thank you. The next question comes from Thomas Chong of Jefferies. Please go ahead.

Thomas Chong, Analyst

Thanks management for taking my questions and congratulations on a very solid set of results. My question is about Q2 revenue, particularly the live streaming revenue. What are the key factors driving the revenue growth? Thank you.

Shaojie Chen, Chairman and CEO

Yes. Thank you for your question. I will help translate. In the second quarter, we faced a short-term pressure on platform traffic and the number of paying users due to the resumption of work and school. However, our constant refinement of operations has developed users' paying habits. Additionally, our continuous improvement and refinements of platform interactive features and products have enhanced user-streamer interactions and increased users' readiness to pay and their payment frequency. As a result, the total number of paying users remains stable at 7.6 million compared to the first quarter of this year. Our ARPPU also increased by 9.5% quarter-on-quarter to RMB 300.06. Our operational refinements across segments helped to improve each segment's monetization efficiency. In particular, our game segment's monetization capabilities continue to improve in this quarter. We have also continued to diversify our content to improve monetization efficiency and the revenue contribution of the non-gaming segment. We have also improved the monetization efficiency of mid-tier streamers through deeper collaboration with talent agencies. Furthermore, the combination of large-scale events and the deployment of weekly ranking systems in the second quarter boosted our platform's monetization capabilities and improved our total net revenue.

Operator, Operator

Thank you. The next question is from Alex Poon of Morgan Stanley. Please go ahead.

Alex Poon, Analyst

I'll translate my question. My first question is regarding your streamer recruitment situation, especially for new games, Brawl Stars and DnF mobile coming soon. Can you share with us your strategy to acquire and recruit these top streamers for new games? Thank you.

Shaojie Chen, Chairman and CEO

Thanks for your question. I will help to translate. In terms of new game titles, we recruit streamers in two ways. First, we discover and encourage streamers with high growth potential from similar types of games to stream the new titles. This helps us generate high-quality content and attract new users to our platform. We also recruit a significant number of streamers by collaborating with top gaming agencies to ensure the quantity and quality of new game-related content. Additionally, we monitor streamer performance in new segments and provide high-quality streamers with resources to help them become top or mid-tier broadcasters. These partnerships with industry-leading gaming agencies enable us to maintain our leadership in promoting and distributing new game titles. As a result, we have maintained a leading position in key metrics such as total builds and user engagements for Brawl Stars and other new titles. Going forward, we will continue leveraging our strengths to maintain our edge in the operation of new titles such as DnF mobile.

Operator, Operator

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

Daniel Chen, Analyst

Thanks and congrats on a very strong quarter. My question is firstly on the content side. What kind of plan do we have for content diversification? And what's the future strategy for both eSport and non-eSport content? The second question is, are we exploring some new products besides our current live streaming platform? And also what's our future strategy in non-live streaming monetization models? Thank you.

Shaojie Chen, Chairman and CEO

Thanks for your question. I will help to translate. In terms of our future gaming content strategy, we will continue to invest in eSport such as League of Legends, PUBG, and Free Fire. We will also closely monitor new blockbuster game titles and explore suitable live streaming games across industry verticals. In the second quarter, we saw great results from the new game Brawl Stars on our platform. We will also continue to recruit streamers for different new game segments to maintain a stable supply of high-quality content and attract more users to our platform. We will build eSports content communities and grow in more game-related areas such as game videos. In terms of our non-gaming segment, we will continue enriching the content ecosystem to meet users’ diverse content demands, such as in food, lifestyle, talent shows, and ACG. Regarding innovation, we have been exploring ways to diversify our revenues. For example, we launched a new business model in voice chat, and the revenue has grown steadily. In the mid-to-long run, we are actively preparing for the deployment of cloud gaming and expect the cloud gaming-related game distribution and advertising business to become our next growth engine when it matures.

Operator, Operator

Thank you. The next question comes from Alex Liu of Chinese Renaissance. Please go ahead.

Alex Liu, Analyst

Two housekeeping questions here. First, what's the major drivers of bandwidth costs this quarter? And how will this trend affect the next few quarters? Also for sales and marketing, the sales and marketing expenses were up quite a bit sequentially this quarter. Any insight on what's driving that? Thank you.

Shaojie Chen, Chairman and CEO

Thanks for your question. I will help to translate. The bandwidth costs increased quarter-over-quarter due to more tournaments and higher user engagement in the second quarter. In addition, we have always been committed to improving our user gaming experience, thus providing users with higher-quality images and content during this period. We expect that bandwidth costs in the second half of 2020 will increase slightly quarter-over-quarter, as there will be more intensive tournaments in the third and fourth quarters. In terms of your second question about sales and marketing expenses, this includes staff and other related expenses, channel promotion costs, online and offline activity expenses, as well as sponsor fees for eSports teams. The increase in sales and marketing expenses in Q2 2020 is mainly due to tournaments-related marketing costs as events gradually resumed and increased sponsorships to crucial eSports teams and channel promotion expenses, as we remain optimistic about the wider development of the eSports industry long-term. We plan to continue increasing investments in eSports-related activities and sponsorships while upgrading our products to improve monetization efficiency and enhance channel promotions. Thus, while the absolute value of our sales and marketing expenses will increase, as a percentage of total net revenue, we will continue to decrease.

Operator, Operator

Thank you. The next question is from Tian Hou of T.H. Capital. Please go ahead.

Tian Hou, Analyst

My question is related to overseas expansion. In the opening remarks, company management mentioned the success in Japan. I would like to have clear details about MAU, paying ratio, and what the top games are on that Japanese platform? What’s the company's plan to release more or what games are you planning to add to that platform? Thank you.

Shaojie Chen, Chairman and CEO

As we mentioned in our earnings call, we have already invested in Southeast Asia and Latin America, but we have noted that the user quality is not sufficient in those areas, so we have decreased our investments there. During the second quarter, we continued enhancing our investment in the Japanese market. We launched the Mildom game live streaming platform in Japan in late September 2019, and its development has exceeded our expectations. According to ABeam Consulting, Mildom ranked among the top platforms in the Japanese game live streaming market, in terms of mobile app downloads, user base, and user engagement. We believe we will continue to explore the Japanese market and deepen collaborations with local partners to achieve better economies of scale. The reason we are focusing on the Japanese market is mainly that Japan is the third-largest gaming market by size, following North America and China. It has almost double the spending power compared to South America and European countries, and gamers are more willing to pay. However, the game live streaming industry in Japan is still in the early stages, inconsistent with this large and mature gaming market, which means there’s huge potential for live streaming in Japan.

Operator, Operator

This concludes your question-and-answer session. I'd now like to turn the conference back over to management for any closing remarks. Please, go ahead.

Mao Mao, Investor Relations

Thank you for joining our call. We are looking forward to speaking with everyone in the next quarter.

Operator, Operator

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