Earnings Call Transcript - DOYU Q4 2021

Operator, Operator

Good morning and good evening, ladies and gentlemen. Thank you and welcome to DouYu International Holdings Limited Fourth Quarter and Full Year 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 would now like to turn the call over to your first speaker today, Ms. Lingling Kong, IR Director at DouYu. Please go ahead, ma'am.

Lingling Kong, IR Director

Thank you, operator, and hello, everyone. Welcome to our fourth quarter and full year 2021 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 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 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 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. I will now speak on behalf of our Chairman and CEO Mr. Shaojie Chen.

Shaojie Chen, Chairman & CEO

In the fourth quarter, we made further headway on our efforts to explore new growth drivers for user traffic and revenue generation as we maintain the stable development of our core businesses. Total net revenues were RMB 2.33 billion and average paying user count reached 7.3 million in the fourth quarter. Mobile MAU for the fourth quarter increased by 7.2% year-over-year to 62.4 million. The MAU growth was mainly driven by three factors. First, during the traditional eSports tournament season, we produced and acquired a range of high-quality content to capitalize on elevated interest in series and surrounding tournament events. We also rolled out a series of promotional events in cooperation with game developers to drive MAU growth. Second, the mobile version release of the blockbuster game League of Legends: Wild Rift helped drive additional traffic to our platform. Leveraging our industry-leading League of Legends streamers, extensive operational experience, and comprehensive content library, we were able to successfully develop and launch a range of exclusive content and promotional campaigns in collaboration with the game developers. By connecting our platform, streamers, developers, and distributors, we were able to develop a comprehensive content ecosystem to secure leading traffic inflows for League of Legends: Wild Rift. Finally, we leveraged the advantages of our integrated content platform to further drive MAU growth through our production and promotion of high-quality short videos. Turning to our content update, during the quarter, we continued to refine our content offerings for both eSports and non-eSports categories. As the continued development of our integrated content ecosystem combines live streaming, videos, graphics, and interactive communities, we also refined customized operations for each game to highlight its unique features. Even as we continue to offer traditional live streaming content services, we also experimented with innovative content formats and operating methodologies to further improve our game-centric content system. Meanwhile, we continue to collaborate closely with game developers to enrich various content formats, improve user engagement, and enhance the viewing experience by providing high-quality large-scale eSports content and fostering interactive communities. These collaborations and efforts enabled us to enhance match engagement and attract new users by establishing an integrated ecosystem combining official tournaments, live streaming content on demand, infographics, and real-time community discussion. With the continuing development of the gaming industry, we are seeing increasing prices and content rights for large-scale eSports tournaments. Meanwhile, the growth in traffic and revenue from these events has lagged far behind the associated corporate cost increases. Following a series of data analysis and simulation studies, we found that although eSports tournaments continue to be important, the value they bring has been declining, and due to the rapid rise in corporate costs, they have become a burden for our platform operation. Therefore, we decided to adopt a selective corporate procurement strategy starting in 2022. For each tournament, we will analyze and evaluate ROI based on expected traffic contribution, revenue contribution, and related costs to determine appropriate corporate pricing so we can ensure the best allocation of our resources. As a game-centric platform, we deliver value to our users through consistent production of high-quality content and our exceptional operational capabilities. Thanks to years of accumulated experience, we have established an industry-leading gaming content management team and streamer cultivation system. Furthermore, we have amassed unmatched streamer resources and game operation expertise, which are the keys to maintaining and growing our platform traffic. Regardless of our acquisition of broadcasting rights for certain tournaments, we will continue to depend on our collaboration with game developers and distributors while increasing investment in our self-produced content to further increase our competitive advantage in the industry. During the fourth quarter, we boosted our investment in proprietary content production, self-producing over 110 eSports tournaments. Notably, we hosted the DouYu League of Legends Wild Rift Master Legends series, a nationwide tournament supported by the game's developer, illustrating our ability to produce high-level tournaments in-house. We continue to recruit and cultivate a large number of potential professional gamers by hosting self-produced tournaments. Our tournaments are highly regarded by both game developers and eSports teams and are expected to be part of the official professional tournament system. We also continue to make innovative developments with our video content. For instance, we produced a number of PGC-related offerings, such as variety shows featuring player preparations for the KPL tournament as a warm-up for the KPL finals. In addition, we invited all Dota 2's top-tier streamers to participate in our self-produced outdoor show Go Fishing, held in conjunction with the international Dota 2 championship. The show proved to be very popular and boosted community engagement within this game segment. Meanwhile, we produced exclusive content for megahit games such as NARAKA: BLADEPOINT, further improving user engagement and stickiness. We invited game producers, gaming media editors, and streamers to participate in an online talk show, which further boosted user participation and enhanced community experience. Along with the continued improvement of our game-centric content ecosystem, we also deepen our cooperation with game developers, especially for newly launched games. For example, we worked closely with the developers of the blockbuster mobile game League of Legends: Wild Rift. Our participation in the game's launch, including the initial stream by the official spokesperson and various task-based incentive user campaigns raised the profile of both the game and our platform. In addition to official collaborations, we also offered various feature content such as guides, teaching streamers how to host game-related QA sessions to create a supportive and engaging gaming environment for the community. As a result of these efforts, our platform's League of Legends: Wild Rift resilient traffic has maintained a leading position in the industry. Going forward, we will continue to deliver and integrate a variety of game content and enhance operations to create a game-oriented community to provide a better user experience and maintain our industry-leading position. Furthermore, we will analyze the ROI for each game segment, evaluate optimization opportunities, and improve our platform's overall operating efficiency by enhancing ROI for each game. Now turning to monetization. The total number of paying users in the fourth quarter was 7.3 million with an average quarterly ARPU of RMB 305. We continue to enhance engagement and consumption levels from our core users through sustainable operating strategies and promotional campaigns, enabling us to sustain a healthy range for our ARPU. While maintaining the stability of revenue from virtual gifting, we will continuously endeavor to explore new revenue streams. In terms of products and technology, as we build our game-centric comprehensive content ecosystem, we added additional innovative features to existing functions and continue to upgrade our streaming platforms product. For example, the variety and interactivity of the live bullet chat commentary are highly valued by our users. However, an inherent limitation of live bullet chat is the difficulty in retaining the content that it generates. To resolve this, we launched the live streaming hot chat channel. This feature is either manually analyzed or uses AI to process training, discussion topics generated during a game stream from resources including live bullet chat commentary and non-real-time content within the community. Training topics are then aggregated and delivered to users through this channel, thereby increasing time spent on viewing video content and community engagement. Successful rollout of these features further enhanced user experience and bolstered the sense of community on our platform. To summarize, we have been ever more innovative on both the content and operations front. Even as we executed our strategy upgrade that has maintained our leading position in the traditional live streaming industry. As a result of our multi-dimensional collaboration with every MAU game developers, we have developed customized features for different game segments and provided users with content that integrates live streaming, video, graphics, and interactive communities. We have continued to explore commercialization initiatives, leveraging our competitive strengths in user engagement and paying behavior. Going forward, we will continue to execute our product, streamers, and content strategy to further explore and strengthen our monetization capabilities and optimize our financial performance. With that, I will now turn the call over to our Vice President of Finance, Mr. Hao Cao, to go through the details of our financial performance in the quarter.

Hao Cao, Vice President of Finance

Thank you, Lingling. Hello everyone. Total net revenues in the fourth quarter of 2021 increased by 2.6% to RMB 2.33 billion. Live streaming revenues were RMB 2.21 billion, an increase of 6.7% from RMB 2.07 billion in the same period of 2020. While the size of our core paying users largely remained stable, our effective operational strategies helped to improve our monetization efficiency, resulting in an 11.7% increase up to RMB 305 in the fourth quarter from RMB 273 in the same period last year. Advertising and other revenues were RMB 118.5 million compared with RMB 198.5 million in the same period of 2020. The year-over-year decrease was primarily attributable to the continued exploration of new commercialization models by using a portion of advertised traffic that could have been directly monetized. Simultaneously, we were also partially impacted by soft demand for advertising costs by a challenging macro environment and regulations related to the gaming industry. Cost of revenues in the fourth quarter of 2021 was RMB 2.08 billion, remaining relatively flat compared with RMB 2.09 billion in the same period of 2020. Revenue sharing fees and the content costs were RMB 1.85 billion, unchanged from RMB 1.85 billion in the same period of 2020. More specifically, there was an increase in revenue sharing fees, which is in accordance with increased live streaming revenues. Such increase was offset by the decrease in the cost of broadcasting rights. Other common costs remained stable on a year-over-year basis, as we continue to optimize in-house production efficiency. Bandwidth costs in the fourth quarter of 2021 decreased by 1.6% to RMB 167.9 million from RMB 170.7 million in the same period of 2020. This decrease was mainly due to lower per unit bandwidth costs, which benefited from our improved procurement efficiency with major suppliers. Gross profit in the fourth quarter of 2021 was RMB 245.7 million, an increase of 34.3% from RMB 182.2 million in the same period of 2020. Gross margin in the fourth quarter of 2021 was 10.5% compared with 8% in the same period of 2020. This increase was primarily due to higher revenues generated during the quarter, while the cost of revenues remained flat. Sales and marketing expenses in the fourth quarter of 2021 were RMB 229.2 million, an increase of 34.3% from RMB 170.7 million in the same period of 2020. This increase was mainly attributable to the increased costs from utilizing additional promotional channels for user acquisition. Research and development expenses in the fourth quarter of 2021 were RMB 132.6 million, representing an increase of 11.5% from RMB 118.9 million in the same period of 2020. This increase was primarily due to increased technical staff costs as we continue to invest in product upgrade to support our game-centric content strategy. General and administrative expenses in the first quarter of 2021 were RMB 98.8 million, decreased by 16.1% from RMB 117.7 million in the same period of 2020, primarily due to decreased professional service fees. Adjusted operating loss in the fourth quarter of 2021 which aspect share-based compensation expenses was RMB 168.7 million compared with RMB 199.1 million in the same period of 2020. Net loss in the fourth quarter of 2021 was RMB 193.2 million compared with RMB 228.7 million in the same period of 2020. Adjusted net loss in the fourth quarter of 2021, which excludes share-based compensation expenses, share of income and equity method investments, impairment loss of investments, and settlement of class action lawsuits, was RMB 112 million, compared with RMB 176.9 million in the same period of 2020. For the fourth quarter of 2021, basic and diluted net loss per ADS were RMB 0.53 and RMB 0.53 respectively, while adjusted basic and diluted net loss per ADS were RMB 0.29 and RMB 0.29 respectively. As of December 31, 2021, the company had cash and cash equivalents, restricted cash, short-term and long-term bank deposits of RMB 6,643 million compared with RMB 7,622 million as of December 31, 2020. We would also like to provide an update on the execution of our share repurchase program announced on August 30, 2021, in which the company may repurchase up to US$100 million of its shares until August 2022. As of December 31, 2021, the company had repurchased an aggregate of US$16.7 million worth of its ADS under this program. Going forward, we will continue enhancing our monetization capability while further improving our monetization efficiency. Additionally, as we continue to grow, we will focus on further utilizing our operating leverage to support the sustainable development of our platform.

Operator, Operator

Thank you. And we will now begin the question-and-answer session. And our first question today will come from Lei Zhang from Bank of America Securities. Please go ahead.

Lei Zhang, Analyst

Thanks management for taking my questions. Two questions here. First, can you share with us some updates on the regulatory change recently and the impact on our business? Secondly, I noted that we have adjusted our content investments in eSports licensing content and can you share with us the logic behind this? Thank you.

Mingming Su, Chief Strategy Officer

Let me answer your first question. There have been continued advances in regulatory guidelines for the live streaming industry, with internal industry results to implement measures and refine operations to comply with regulatory requirements. No new rules were introduced additionally. We have made internal operational adjustments, adopted a more prudent operational strategy, and implemented strict internal reviews to improve the platform’s community building and to promote the long-term development of our platform. For example, for unlicensed games, we have been gradually redirecting traffic and streamers to license their games of similar genres since the third quarter of 2021 to ensure proper traffic allocation between different game segments, maintain streamer income levels, and their willingness to stream. The initial impact of these adjustments was reflected in our first quarter performance. We will also pay close attention to any regulatory changes and adjust our operational strategies in a timely manner. Thank you.

Shaojie Chen, Chairman & CEO

Lingling Kong, IR Director

Okay. I will translate Mr. Chen's answers. So as we previously mentioned in the prepared remarks, we have conducted extensive analysis and calculations in the context of the increasing tournament content license fees. We concluded that the growth in game traffic or revenue generated by these large tournaments has been significantly outpaced by the growth in corporate costs. Our analysis of user behavior data found that a majority of our users primarily watch games live streamed by individual streamers. So in comparison, the proportion of users who mainly watch the tournament is relatively low. Meanwhile, the return rate of inactive users through tournament content has been declining. Historical data shows that large-scale eSports tournaments do not drive revenue growth; they can even have a negative impact on our platform's revenue. This is due to the different user experience delivered by these two content segments; while watching tournaments is a completely immersive experience, virtual gifting revenue is generated by interactions between users and streamers. During the tournament, users are immersed in watching the game and therefore tend to spend less time interacting with streamers, which negatively impacts their willingness to pay. Based on this, we have adopted a selective corporate procurement strategy. We conduct a comprehensive evaluation on the deliverable value of each tournament both in terms of traffic and monetization to determine our corporate copyright price. We will continue ongoing dialogue with copyright owners regarding copyright prices and explore more rational and long-term models for cooperation. For those purchased content licenses, we aim to improve the return on investment through innovative operational methods. We would like to emphasize that our selective purchase of permanent copyrights does not mean that we will reduce our investment in content. Based on our in-depth understanding of the gaming industry, and years of operational experience, we will deepen our cooperation with game developers and increase our investment in original content operations and community building in order to keep our competitive advantage in premium content and game operations. Thank you. Operator, next please.

Operator, Operator

And thank you. Our next question today will come from Yiwen Zhang of China Renaissance. Please go ahead.

Yiwen Zhang, Analyst

Thanks everyone for taking my question. So, three questions. So, just wondering, you mentioned some adjustments to how we license corporate procurement, which actually generates a lot of discussion. So, what's your part will be in live streaming competition as of now? And secondly, recently there were some streamers who are considered to be final participants in the minimal paying for back taxes on the amenities. So, just wondering if this has any impact on our new sharing policy. And then lastly, we know that we have a game content-centric strategy. So what's the implication from our marketing strategy and also expand it? Thank you.

Shaojie Chen, Chairman & CEO

Lingling Kong, IR Director

As I mentioned earlier, we adjust our corporate procurement strategy because we believe the value delivered to us by corporate is not in line with the increase in costs. Another factor behind this strategic adjustment is the evolving environment of the live streaming industry. As previously mentioned, the growth rate of new user acquisitions through game live streaming is decreasing. Take large-scale eSports tournaments as an example; they delivered a substantial amount of new traffic in early stages of game live streaming, especially high-quality users in the eSports segment. With the development of gaming live streaming, high-quality users have become regular users of live streaming platforms. These users have certain preferences for the platform's regular streaming content, so that their viewing hours and stickiness to the platform are relatively stable. Therefore, it is very difficult to drive additional traffic growth by only broadcasting eSports tournaments. However, we have seen that the continued expansion of short video platforms has attracted more diverse user groups to consume gaming content, while enlarging the potential user base for the entire gaming content industry. That is to say, our industry has already transitioned from a competition in gaming live streaming to gaming content. At the same time, our user acquisition strategy has also transitioned from a stage of capturing hardcore gamers to stabilizing our hardcore gamer base while attracting new cash flow and core gamers. Our platform primarily consists of hardcore gamers, whose live streaming service penetration rate is high. They have high expectations for the quality of our content and our streamers. This user group is very stable and provides steady traffic through our platform. The live streaming penetration rate for casual and mid-core users is relatively low, as we have more diversified needs for game genres and game content. We believe that short videos, graphics, and other comprehensive game content and community-centric features can attract casual and mid-core gamers. This is the reason why we expand our content offerings and build our communities. So as various options for users consistently grow, we believe that differentiated content, refined operations, and improved profitability are the keys to stable and healthy growth for the platform. Therefore, starting last year, we have been implementing platform strategy upgrades to continuously refine our live streaming video and graphic content so that we can enlarge our user base to more casual and mid-core gamers. Thank you.

Hao Cao, Vice President of Finance

Regarding the second question about the taxation, first of all, we have strictly and continuously adhered to our relevant laws and regulations regarding taxation. As a result, investigations into tax irregularities of individual streamers did not negatively impact our platform. For streamers, who are directly contracted with us, we withhold their income taxes to ensure the tax obligations are fulfilled. Separately, there are a large number of streamers who signed their contracts with third parties, as the obligation to pay income taxes lies with these third parties. We strongly advise those partners to comply with tax laws. At present, our streamer engagement models have not changed. As I just mentioned, because we consistently uphold these strict tax compliance requirements, investigations into tax irregularities of individual streamers have not negatively impacted our platform. Therefore, we will not adjust our revenue sharing fee structure as a result of the recent investigations into tax evasion. About the last question on the sales and marketing strategy, as I mentioned previously, our high-quality traffic generation has slowed down due to pure gaming live streaming. Competition within the industry has switched from gaming live streaming to gaming content. Our user acquisition strategy has also changed from hardcore gamers to stabilizing hardcore gamers while attracting new casual and mid-core gamers. Hardcore gamers are our core user group. For a long time, this user group has preferred specific game genres and live streaming with higher stickiness to our platform. Based on our long-term operating experience and accumulated user behavior data, we will maintain stable streamer resources to ensure continued supply of high-quality content. We will also produce more exclusive self-produced content and launch additional marketing campaigns to increase user activity and build a healthy game-centric community. Casual and mid-core gamer user groups are the ones we are increasingly targeting. This group is relatively large and has more diverse needs in terms of gaming content and categories. By targeting this user group, we enhance our cooperation with game developers to attract new users through our innovative operations and traffic acquisition. Meanwhile, we leverage our high-quality content to produce short videos, to promote our platform and acquire users while improving user stickiness utilizing our active community. Both approaches delivered encouraging results demonstrating our platform's competitive advantages in our rich content library and a vibrant game-centric community. Thank you.

Operator, Operator

Our next question today will come from Thomas Chong of Jefferies.

Thomas Chong, Analyst

Thanks management for taking my questions. My first question is about the gaming approval. Does the slowdown in gaming approval affect our operations? And my second question is about our share repurchase plan. Can management comment on the progress that we should anticipate in coming quarters? Thank you.

Mingming Su, Chief Strategy Officer

Let me answer your first question. We have not seen any significant impact on our existing users from the slowdown of approvals for new games, as our business is based on the conversion of gamers into viewing hours of game-centric content. There are a large number of players of many high-quality games who are our existing or potential users following successful conversion of gamers into viewers of our game-centric content. Operational metrics such as user stickiness, time spent per user, and user engagement have remained very stable. The primary impact from the slowdown in approval for new games has been on new user growth, which is reflected in our recent momentum. The approval of new games is not on hold; rather, the slowdown has been caused by stricter standards for approval of new games, which we believe will be advantageous for the gaming industry in the long run. As for game-centric content platforms, such as DouYu, we will also benefit from these stricter standards since high-quality games and their users are the most important resources for our content generation and user growth. Recently, the quality of the games launched on our platform has been very high. Through the integration of live streaming video content, graphic content, community discussion, and our customized operations for each game segment, we have been able to successfully promote these premium games and attract new users. This has further demonstrated the effectiveness of our operational strategy of cultivating a diversified game-centric content community.

Hao Cao, Vice President of Finance

Okay. About the second question, by the end of August we had announced a share repurchase program for a total amount of US$100 million. As of December 31, 2021, we had repurchased an aggregate of US$16.7 million worth of ADS. Due to the impact of certain SEC rules and restrictions, a large portion of the repurchase funds has been set aside for further repurchase but has not been settled yet. Thank you.

Operator, Operator

Our next question today will come from Alex Poon of Morgan Stanley. Please go ahead.

Alex Poon, Analyst

I have two questions. My first question is related to our performance after our strategic change. Is there any performance data that we can share? And second is my second question related to new games launch. What is our operating policy for new games launch? And is there any data that you can share with us at this stage? Thank you very much.

Shaojie Chen, Chairman & CEO

Lingling Kong, IR Director

So, during the past year, we have upgraded our content product offerings centered around our game-centric content platform. On the content side, we expanded our content to include video and community segments, well-integrating live streaming video and graphic content communities and other content forms. We have also cooperated with game developers to carry out multifaceted promotions and content offerings to meet the diversified needs of our users. On the product side, we made multiple upgrades to our mobile interface. On one hand, we highlighted our video content, graphic content, and community functions. On the other hand, we refined our customized operations to highlight each game's features. We were able to increase community activity and user engagement through our customized content layout and promotional activities for different game segments. For our marketing leading traditional eSports, we continue to foster our close relationship with game developers to jointly host tournaments and the launch of self-held promotional activities. Furthermore, we are refining our content offerings and operations to improve retention rates, user activity, and user stickiness. Building on our advantages in traditional eSports games, we expanded our gaming coverage into NiNe Esports games. NiNe Esports games additions mainly came from newly released games, to which we have applied our upgraded content system and game segment-based operating strategy. We have achieved promising results and devised operating mechanisms that are both effective and efficient. We have achieved encouraging results for new games launched in 2021, including NARAKA: BLADEPOINT, League of Legends mobile, and the recently launched Tower of Fantasy by successfully executing our upgraded operating strategy. As a content platform, the evolution of our content ecosystem and changing user perceptions of our platform are both cumulative processes. We are confident that we will continue to implement our operating strategy; the viewing time for nontraditional gaming content will increase as a proportion of overall viewing time. Our platform content will become more diversified and will cover more user groups. Thank you.

Mingming Su, Chief Strategy Officer

Let me answer your second question. Following a year of implementing our game-centric operations, we have produced a major system with established procedures for new game segments and their respective operating strategies. For our new game, we attracted top streamers to stream and promote the game during the launch date. We also recruit and cultivate a large number of new streamers to ensure continued supply. In terms of videos and graphics, we collaborate with game developers and streamers to produce content such as multiple PGC videos and graphic-centric guides to actively promote games. Through this means, we increase user viewing time and enhance user engagement. For our gaming communities, we invite influencers such as K.O.L to create hot topics and foster interaction between streamers, game developers, and users. At the initial stages of our games launch, we established an integrated gaming segment. This combines live streaming promotional events and gaming strategy discussions to provide comprehensive game content to our users. For newly released games, gamers already have many questions. We summarize and analyze these questions and assign solutions and content creation tasks to streamers. By doing this, we gradually form our game-centric helpful and friendly discussion-based environment. Take Tower of Fantasy, for example. Each day, over 50% of its players on our platform not only view live streams but also participate in our gaming activities and game-related discussions. During our game's growth stage, we collaborate intensely with the game's developers. Take League of Legends mobile as an example; we encourage users to complete certain tasks for offering virtual rewards, such as in-game items. Both user growth and viewing time increased impressively. Meanwhile, we produced a variety of game-centric PGC content, such as chat-based talk shows that were tailor-made for NARAKA: BLADEPOINT to effectively enhance user engagement and community experience. In addition, based on each game's features, we improved our production and marketing of in-house tournaments. The DouYu League of Legends: Wild Rift Master series mentioned in the prepared remarks is a great example. Among the new games released in 2021, NARAKA: BLADEPOINT was launched in July, League of Legends mobile was launched in November, and Tower of Fantasy was launched in December. The performance of these three games demonstrates our platform strength operating strategy. Both live streaming volume and user activities during the month after each game launched at least doubled. Operating data shows solid momentum and the ranking for these games on our platform steadily increases. Total viewing time for NARAKA: BLADEPOINT was ranked within the top 10 games on our platform for two quarters. Total viewing time for League of Legends mobile also ranked within the top 10 during the quarter of its launch. We are leading the market in terms of the proportion of sales, cultivated streamers, live streaming volume, and user engagement for these new games. Overall, we see pleasing results for our full lifecycle operation for new games. We have attracted additional users to our platform, demonstrating that we are on the right track with implementing our diversified game content ecosystem. Furthermore, the system established around game segments has enabled us to build a solid foundation for improving our operating efficiency. I think this helps.

Ritchie Sun, Analyst

So I noticed that the self-set marketing expenses grow much faster than the top-line growth. Can management comment on why is that? And how do we assess the effectiveness of traffic acquisition? And how will this market expansion trend in the next few quarters? Thank you.

Hao Cao, Vice President of Finance

Okay. Sales and marketing expenses mainly consisted of staffing costs, promotion costs in China, expenses for online and offline events, and sponsorship fees for eSports teams. The year-over-year growth was mainly due to increased promotions for our new product features and increased costs from utilizing additional promotional channels for user acquisition along with the upgrade of our content offerings. As previously mentioned in our discussion regarding our platform strategy, we need to expand our promotional efforts to increase our coverage and influence to attract more casual and mid-core gamers. We will carefully select the appropriate marketing channels based on continued data analytics to increase our marketing efficiency on a dynamic evaluation basis. We will continue to increase spending on the channels delivering high-quality users and cut back or stop spending on those channels whose acquisition efficiency or user quality does not meet our standards. Thank you.

Operator, Operator

Great. Thank you. Okay. And ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to management for any closing remarks.

Lingling Kong, IR Director

Thank you for joining our call. We look forward to speaking with every one of you next quarter. Bye.

Operator, Operator

Ladies and gentlemen, the conference has now concluded, and we thank you for attending today's presentation, and you may now disconnect your lines.