Earnings Call Transcript - DOYU Q2 2022

Operator, Operator

Good morning and good evening, ladies and gentlemen. Thank you and welcome to DouYu International Holdings Limited's Second Quarter 2022 Earnings Conference Call. Please note today's event is being recorded. I will now turn the call over to the first speaker today, Ms. Lingling Kong, IR Director at DouYu. Please go ahead, ma'am.

Lingling Kong, IR Director

Thank you. Hello, everyone. Welcome to our second quarter 2022 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 second quarter 2022 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 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. I will now speak on behalf of our Chairman and CEO, Mr. Shaojie Chen.

Shaojie Chen, CEO

In the second quarter, we continued to explore new growth drivers while increasing our investment in self-produced content. In addition, we tightened our cost control and improved revenue quality by structural adjustment of our revenue stream, resulting in a profit turnaround for the quarter. This quarter, our mobile MAU was 55.7 million. Total net revenues were RMB1.83 billion and quarterly paying user count was 6.6 million. By prudently adjusting our copyright procurement strategy and deftly implementing cost control, we increased our gross margin to 6.9%. Meanwhile, we made solid progress to improving operating efficiencies as our adjusted net income reached RMB23.5 million. I am pleased to share with you that we have achieved our goal of maintaining stable mobile MAUs from the fourth quarter of the year through the second quarter. In the quarter, average mobile MAUs were 55.7 million, a decline of 8.2% year-over-year, but an increase of 1.1% quarter-over-quarter. We believe there are two factors at work. First, as we execute on our selective copyright procurement strategy, we have seized acquiring overpriced content rights for eSports tournaments starting in the fourth quarter, which led to a year-over-year decline in MAUs caused by traffic loss from users primarily on our platform. Those losses in tournament users negatively affected our MAU base; however, this had a limited impact on our revenue. The second quarter of the year is the traditional peak season for official tournaments, with a high number of users on livestreaming platforms compared with the fourth quarter. Therefore, it is very difficult to stabilize quarter-over-quarter traffic in the absence of certain official tournaments on our platform. However, thanks to our high-quality streamers and refined content such as self-produced tournaments, we retained old users and attracted new users during the quarter. As a result, our mobile MAUs achieved a sequential increase, indicating that the negative impact of our selective copyright procurement strategy has been realized and absorbed by our business. Second, we collaborated with game developers to launch promotional activities to attract new platform users, partially offsetting a portion of the decrease in MAUs that resulted from no longer purchasing certain copyright content. For example, we launched a promotion in our livestreaming channel with the game developer of Peacekeeper, where users could purchase the most popular in-game items within a limited time period. This promotion successfully attracted a significant number of gamers to participate, which contributed to the growth of new users and galvanized the return of some inactive users. Turning to our content update. In the second quarter, we maintained the effective execution of our strategy of building a game-centric comprehensive content platform while further investing and innovating in self-produced content. Based on users' differentiating preferences and game features, we collaborated with well-known streamers, game developers, and distributors to customize high-quality IP content shows, further enriching our content ecosystem by integrating livestreaming, video graphics, and interactive communities. In the second quarter, we continued to enhance the diversified content system for our self-produced tournaments and increased investment in self-produced content focused on refining content and operations according to game categories. We produced close to 95 eSports tournaments in the quarter to meet the differentiated needs of our users. These tournaments can be divided into two categories: the first for hardcore gamers and the second for casual gamers, including college students and light gamers. Leveraging years of experience in operating eSports tournaments, our self-produced professional tournaments received widespread acclaim from both game developers and hardcore gamers. During the quarter, our self-produced DouYu Honor of Kings master tournament was once again selected by the game's developer as its official collaboration partner. For the first time, users were able to participate in this tournament through an innovative combination of online and offline formats, increasing user engagement and creating the Honor of Kings tournament as DouYu's intellectual property that can be enjoyed by every user category. With the popularization and deeper penetration of eSports, we have created and developed more unique and differentiated tournaments that are open to all comers. To cater to diverse user demands, we organized a variety of differentiated events, including college selections to discover top gamers, LOL competitions, and the 5v5 festival for Honor of Kings. This event attracted both new and regular users by inviting well-known guests to attend and using novel methods for competition and unique ways for players to team up. During tournament promotional and hosting periods, we stimulated a second round of active discussions between different platforms and communities by promoting warm-up campaigns and tournaments' post-match highlights. By doing so, we further enhanced user engagement and created an exciting and absorbing environment on our platform. Regarding our previously purchased copyright, we continue to collaborate closely with game developers and integrate official tournaments with our livestreaming, video graphics, operating activities, and community discussions to increase user engagement and attract new users. Using KPL's spring tournament as an example, we self-produced several shows derived from tournament IP content. In addition, the KPL eSports team we signed in Wuhan, eStar, won the spring season championship. Going forward, we will continue to execute our selective copyright procurement strategy and make purchases of cost-effective content. We will analyze and evaluate the ROI for each tournament based on metrics such as traffic contribution, revenue contribution, and costs. In addition to tournament content, we continue to create entertaining gaming content. We developed and released a sports livestreaming gaming knowledge quiz show, Gaming Experts. More than 120,000 users participated in the online quiz contest, which attracted over 8 million live viewers. Furthermore, as we increased our investment in high-quality gaming content and the development of our diverse content ecosystem, we continued to refine our operations and successfully raised ROI for our game segment by improving revenue quality and implementing content cost controls. We successfully enhanced our platform's operating efficiency while still delivering innovative premium content and maintaining our advantage in game-centric operations. Now, turning to monetization. Our total paying user count in the second quarter was 6.6 million, with an average quarterly ARPU of RMB276. In the content and trend of promoting rational consumption in livestreaming, we proactively adjusted and refined our platform's operations, and we have been making ongoing changes to maintain compliance with the latest regulation guidelines. As a result of this modification, our paying user count and ARPU declined on a year-over-year basis but remained stable on a quarter-over-quarter basis. As a matter of fact, this adjustment and optimization actually increased the quality of our virtual gifting revenue and improved sustainability by encouraging healthier paying habits among users. For example, by utilizing customized promotional campaigns based on the preferences of different user groups, we continue to stabilize our core users’ willingness to spend and enhance casual and mid-core gamers’ engagement to cultivate their playing habits. By adopting more sustainable operating strategies, we have been able to maintain a stable paying user base and sustain a healthy range for our ARPU. Meanwhile, we continue to explore and develop our membership services as demonstrated by a healthy sequential growth in the second quarter since we upgraded the Diamond Fans membership system in the previous quarter. Our membership service is an important interactive tool to maintain the interaction between our streamers and their fans. As such, we continue to release additional value-added features, including exclusive in-game advice services that are related to game features and streamers’ distinctive characteristics. This has further enhanced the stickiness of fans and increased the willingness of users to subscribe to membership services. Going forward, we will continue to explore new and diversified monetization channels. In terms of technological innovation and development, we have been strengthening our in-depth cooperation with game developers. Last quarter, we cooperated with the Dota 2 game developer to share partial gaming data and then employ this data to develop a number of gradual functions. During this quarter, we extended our cooperation scheme so that now we also share partial gaming data with the developer of Honor of Kings. We launched customized features that allow users to display game achievements and rankings on our platform with users’ consent. By connecting their gaming accounts with DouYu accounts, users' game achievements, such as gaming badges, can be displayed when they participate. Sharing gaming information in this way improves user experience by fostering further connection between gamers and streamers in a variety of different scenarios. In addition, our collection of gaming data and platform user behavior makes it possible for us to leverage machine learning technology to provide more accurate content recommendations for game users with different characteristics. Overall, based on the stable performance of our traditional livestreaming business, we increased our investment in self-produced content and optimized our operational innovation to better target and customize our content based on user preferences and game features. Furthermore, we deepened our collaboration with game developers to further augment our content offerings of integrated livestreaming, videos, graphics, and interactive communities. We are continuing to develop a robust and healthy game-centric ecosystem. In regards to financial performance, we enhanced our monetization capabilities, explored new monetization models, and improved our operating efficiency by implementing effective cost control and expense optimization. Through the consistent ROI enhancement of each game segment, we are realizing our platform's potential for long-term and sustainable growth.

Hao Cao, Vice President of Finance

Thank you, Lingling. Hello, everyone. Last quarter, we stated that our top priority was to reach non-GAAP breakeven by improving operating efficiency. I’m delighted to see that our performance exceeded our expectations. During the second quarter, our gross margin further expanded to 16.9%, and we recorded an adjusted net income of RMB23.5 million. This demonstrates the effectiveness of our execution on operating efficiency improvements through refined ROI enhancement and effective cost and expense controls. Total net revenues in the second quarter of 2022 decreased by 21.6% year-over-year to RMB1.83 billion. Livestreaming revenues were RMB1.77 billion, a decrease of 18.8% from RMB2.18 billion in the same period of 2021. The decrease was due to the continued implementation of prudent operating strategies such as adjustments to certain interactive features and related operational efforts. For the long-term healthy development of our platform, we have made operational adjustments and future updates in advance and have been highly responsive to the newly announced guidelines in order to fully comply with regulatory requirements. As a result of these adjustments, virtual gifting interactions were partially impaired, causing year-over-year decreases in both the number of paying users and quarterly ARPU. However, the number of paying users and the quarterly ARPU remained stable at the current level as we continue to stabilize the paying habits of our core users and cultivate the willingness of mid- to long-tail paying users. Our quarterly ARPU was RMB276, an 8.7% decrease from RMB303 in the same period last year, but a 2.4% increase on a sequential basis. Advertising and other revenues were RMB64.9 million compared with RMB158.7 million in the same period of 2021. The year-over-year decrease was primarily attributable to the continued exploration of new commercialization models by using a portion of advertising traffic that could have been directly monetized and the soft demand for advertisements coupled with the COVID resurgence in China. Cost of revenues in the second quarter of 2022 was RMB1.52 billion, a decrease of 24.9% compared with RMB2.03 billion in the same period of 2021. Revenue sharing fees and content costs decreased 27.2% to RMB1.31 billion from RMB1.81 billion in the same period of 2021, driven by several factors. The decrease in revenue sharing fees outpaced the decrease in livestreaming revenues, leading to a lower revenue sharing ratio. This demonstrates the effective execution of our prudent operating strategies with a focus on efficiency improvements. The cost of broadcasting rights decreased significantly as we ceased acquiring overpriced content for eSports tournaments as part of our selective copyright procurement strategy. Other content costs also recorded a year-over-year decline as we continued to optimize in-house content production efficiency. Bandwidth costs in the second quarter of 2022 decreased by 11.2% to RMB143.7 million from RMB161.8 million in the same period of 2021. The decrease was mainly due to a year-over-year reduction in peak bandwidth usage in the absence of purchased eSports tournament copyright, given that our bandwidth costs are generally built based on peak bandwidth usage. Meanwhile, the lower per-unit bandwidth costs benefited from our improved procurement efficiency with major suppliers contributing to the decrease in bandwidth costs. Gross profit in the second quarter of 2022 was RMB309 million compared with RMB306.5 million in the same period of 2021. Gross margin in the second quarter of 2022 expanded to 16.9% from 13.1% in the same period of 2021, a sequential improvement of 330 basis points from the first quarter. This improvement was primarily due to the significant decrease in the cost of rights as a percentage of revenues as we ceased acquiring overpriced content rights for eSports tournaments as well as the lower revenue sharing ratio, benefiting improvement in revenue quality and our sustainable operating strategy. Sales and marketing expenses in the second quarter of 2022 were RMB167.5 million, a significant decrease of 43.2% from RMB295 million in the same period of 2021. This was mainly attributable to the decreases in both marketing expenses for user acquisition and personnel-related expenses. Research and development expenses in the second quarter of 2022 were RMB101.9 million, representing a 17.2% decrease from RMB123 million in the same period of 2021, primarily due to the reduction in personnel-related expenses. General and administrative expenses in the second quarter of 2022 were RMB90.7 million, decreasing by 11.7% from RMB102.6 million in the same period of 2021, due primarily to decreased professional service fees. Adjusted operating income in the second quarter of 2022, excluding share-based compensation expenses, was RMB0.3 million compared with an adjusted loss from operations of RMB165.1 million in the same period of 2021. Net loss in the second quarter of 2022 was RMB38.8 million compared with RMB181.7 million in the same period of 2021. The expanded gross margin and deeper expenses combined to deliver two consecutive quarters of narrowing losses. Adjusted net income in the second quarter of 2022, which excludes share-based compensation expenses, share of loss in equity method investments, and impairment loss of investments, was RMB23.5 million compared with an adjusted net loss of RMB145.1 million in the same period of 2021. For the second quarter of 2022, basic and diluted net loss per ADS were RMB0.1 and RMB0.1, respectively, while adjusted basic and diluted net income per ADS were RMB0.1 and RMB0.1, respectively. As of June 30, 2022, the company had cash and cash equivalents, restricted cash, short-term and long-term bank deposits of RMB6,685 million compared with RMB6,643 million as of December 31, 2021. Going forward, we will focus on delivering sustainable profitability through our continued operational efforts and cost controls and improvement of revenue quality, along with the ongoing improvement of our overall ROIs. We will continue enhancing our monetization capabilities to support the long-term development of our platform.

Operator, Operator

Thank you. The first question comes from Lei Zhang with Bank of America.

Lei Zhang, Analyst

Thanks management for taking my question. Two questions here. First, any update on the livestreaming regulation launched in May? And can you share with us its impact on our business? Secondly, on your current operation in eSports tournaments and any change in our future plan in the licensed eSports content? Thank you.

Hao Cao, Vice President of Finance

Let me answer your first question. We were included in the registered regulations on virtual gifting, including protection on minors, ranking systems, and other areas. After analyzing the guidelines, we believe that the permit to guide users to consume rationally by limiting certain sectors. In the context and the trend of promoting rational consumption of livestreaming, we implemented a series of measures such as setting limits on singles' transactions for virtual gifting and requiring a second transformation for each transaction. In June, we continued to update our platform status per the latest guidelines. These updates included adjusting our ranking systems in regards to multidimensional data, limiting PK time around peak hours, and adjusting reports for performance metrics. This adjustment to our operations has led to an improvement in the quality of our revenue. By implementing positive and healthy operating spending, our development focus has shifted from generating total revenue growth to creating high-quality revenue growth by stabilizing spending habits of our core users and attracting small, mid, and long-tail paying users with lower ARPU. We have been carrying out these structural adjustments since the end of 2021; therefore, we do not anticipate significant incremental negative impacts on our revenue based on the operating performance since the latest update in June. Thank you.

Operator, Operator

Thank you. The next question comes from Alex Poon with Morgan Stanley.

Lingling Kong, IR Director

Excuse me. Hi, operator, we are still answering the second question.

Shaojie Chen, CEO

Currently, our eSports tournament broadcasting rights cover a variety of popular games such as Honor of Kings, CrossFire, Dota 2, etc. For eSports tournament content, we further diversified our content offerings by integrating livestreaming with video, graphics, and interactive communities to meet our users' differentiated needs. The gaming content industry in China has developed into a healthy growth stage, and we anticipate that the pricing of eSports copyrights will gradually fall back into a reasonable range in the near future. Therefore, we will continue to execute our selective copyright procurement strategy. Our bids for those copyright purchases will be based on an evaluation of the monetization capabilities and traffic contribution driven by each eSports tournament broadcasting right. At the same time, we will deepen our collaboration with game developers through utilizing partner resources and joint operations to control content costs. Under this strategy, we are in active negotiations regarding more copyright partnerships with game developers. As we mentioned earlier, eSports tournament broadcasting is only one part of our comprehensive gaming content. As we will see more and more options, we believe differentiated content and refined operations are key to our platform's stable and healthy growth. Despite the absence of some important eSports tournaments, our average mobile MAUs achieved quarter-over-quarter growth, proving that our selective copyright procurement strategy is a step in the right direction. By leveraging our deep understanding of the gaming industry, years of experience, and the livestreaming resources, we will continue to expand and deepen our collaboration with game developers while further investing in game-centric self-produced content to stabilize traffic on our platform.

Operator, Operator

Thank you. Our next question comes from Alex Poon with Morgan Stanley. Please go ahead.

Alex Poon, Analyst

Thanks management for taking my question. My first question is related to our self-produced content. Can management share their view on how we produce self-developed content and how do we ensure the quality of this content? My second question is about game license approval. Since licenses have resumed in April, has that been helping our traffic growth and revenue growth? Thank you.

Shaojie Chen, CEO

So regarding the self-produced content, as a business-centric platform with diverse content, the key to attracting and retaining users is satisfying their varying needs and creating an engaging community environment for them. Because users are the most important component of our platform, we are motivated to make content and product upgrades from their perspective. In terms of gaming content, different user groups look for different kinds of gaming content. Hardcore gamers focus more on the competitive aspect of games and prefer streamers who are professional and highly skilled. Casual gamers, on the other hand, will have a better experience with streamers who can create an enjoyable atmosphere while livestreaming. Therefore, we designed different tournament content to cater to different user preferences. For hardcore gamers, we produce tournaments focusing on showcasing the streamers' outstanding gaming techniques to provide a professional SKU-oriented varying experience. A part of hardcore gamers are college students who are also some of our core users on the platform. In the second quarter, we held an Honor of Kings tournament in collaboration with eight well-known colleges, coached by several famous streamers. It was highly popular and much discussed among college students. By the end of the second quarter, we have cumulatively hosted nearly 700 eSports tournaments involving more than 700 colleges, giving DouYu's brands strong appeal and influence among college students. When organizing entertainment-based tournaments, we focus on enhancing user engagement and interaction. During the quarter, we produced the top League of Legends fans tournament, which was designed for fans of the League of Legends Pro League. We recorded more than 450 fans representing 16 professional LPL teams, giving them the stage to honor their favorite team by fighting for victory in the tournament. As the fourth large-scale fan tournament in the industry, we invited professional LPL commentators and professional players to commentate on the tournament, adding depth and assortment to the viewing experience. In addition, we also hosted a 5v5 festival for Honor of Kings and invited popular streamers to team up with fans to play the game well. This casual event naturally became a huge party for streamers, users, platforms, and game developers. We have now fully integrated our product streaming content within our diverse tournament content system, coupled with videos, graphics, and community discussions. This comprehensive content system supports various promotions through different mediums and platforms at different stages during this event and has achieved solid results. We have observed growth in viewing traffic, longer viewing hours, and more interactions using bullet chats during our self-produced tournaments compared to typical levels in this gaming segment.

Hao Cao, Vice President of Finance

Let me answer your second question about the new game approvals. We were pleased to see the reduction of new game approvals. It seems that the gaming market is developing towards diversification and sophistication based on the general number of recently approved games. In the long run, we believe that this development will benefit the gaming industry and gaming content platforms like DouYu. High-quality and engagement-driven games are our primary types of campaigns and user interests. As more new games are being approved, game developers are starting to resume promotional campaigns in response to the new games release. We adjusted our focus from generating advertising revenue to deeper collaboration with game developers. By providing support through our promotional campaigns, we have increased their game pool and improved download conversion data while boosting our competitiveness in the industry. For example, two new games we promoted in the second quarter achieved encouraging results in terms of the number of games played, repetition, and activation. Thank you. Operator, please proceed to the next question.

Operator, Operator

Thank you. Our next question comes from Thomas Chong with Jefferies.

Thomas Chong, Analyst

Thanks, gentlemen, for taking my question. We have talked about our copyright content procurement strategies and the negative impact on MAU that is gradually paying off. So, just wanted to get some more color about the work that we have done to achieve this outcome. Thank you.

Shaojie Chen, CEO

When we made the decision to execute our selective copyright procurement strategy, we expected that we would lose some users who primarily watch official tournaments on our platform in the absence of some overpriced tournaments. We see this as part of our overall strategy to stabilize traffic, such as increasing our investment in self-produced content. Meanwhile, we closely tracked the performance of the gaming segment that lacked official tournaments to swiftly adjust our content offerings and operations. Thanks to these countermeasures, our platform's mobile MAUs performed better than we had anticipated, especially in the second quarter, during which more official tournaments were held. We saw a quarter-over-quarter increase in mobile MAUs as opposed to our expected decline. Moreover, user behavior has been consistent with our expectations. Most of the MAU decline we experienced from our new copyright procurement strategy was among users who primarily watched official tournaments, which were our main source of traffic. Conversely, our long-term, continuous stable users who focused on streamers’ content—the large quantity of high-quality users—are characterized by their high retention rates, longer viewing hours, and stickiness to high-quality livestreaming content. Leveraging our stable streamer structure, we worked with streamers of different characteristics to launch creative content and diversified our promotional activities based on approaches developed with game developers. In the LoL segment, we launched a series of promotional tournaments to maintain the number of viewing hours and interactions for our self-produced content at a stable level. In the Peacekeeper segment, we collaborated with game developers to launch limited promotions for in-game items during livestreams. This not only attracted new users but also substantially increased the number of viewing hours and interactions of self-produced content. Since we have successfully stabilized our core user base and attracted new users while utilizing streamer resources and self-produced content, we believe the negative impact from the absence of certain tournament copyrights has fully absorbed.

Operator, Operator

Thank you. The next question comes from Yiwen Zhang with China Renaissance.

Yiwen Zhang, Analyst

I have a couple of questions. First, regarding monetization, in the prepared remarks, you mentioned we are exploring more diversified monetization. Can you discuss any more details, for example, what the business progress of our memberships and other monetization channels are exploring? And secondly, our gross profit margin—we note a solid improvement in this quarter. Can you discuss the drivers behind that, for example, how much of that is attributable to content cost-saving? And how should we look at our whole year gross profit margin trend? Thank you.

Hao Cao, Vice President of Finance

Regarding the first question about new business models, we have been exploring new models of commercialization with the goal of both increasing virtual gifting revenue and exploring other revenue streams beyond virtual gifting. Here are some examples: in the last quarter, we upgraded our Diamond Fans membership system, designed to increase virtual gifting revenue by enhancing engagement between Diamond Fans users and streamers. Upon membership subscription, users gain access to additional value-added services and more opportunities to interact with streamers based on gaming scenarios. Streamers provide exclusive in-game advice services and rewards for Diamond Fans users. This quarter, we improved the system by offering more customized features based on streamers' characteristics, further enhancing users' loyalty and improving membership paying ratios. Numbers of membership subscriptions grew healthily quarter-over-quarter with steady improvements in renewal rates. Going forward, we will build an integrated membership system that offers platform privileges, interaction with streamers, and game benefits in a single package. In addition to the services we offer on the platform, we will strengthen our collaboration with game developers to provide more value-added benefits for Diamond Fans users. In terms of advertising models, we continued to refine the aforementioned smart distribution system as a supplement to traditional direct response advertising and display advertising. The current goal of this system is to improve conversion rates from game viewership to monetization. Our smart distribution system platform enables game developers to release promotional tasks while allowing streamers to choose their preferred method for promoting games. This lets streamers enjoy greater flexibility while fulfilling their task-based promotional obligations. So far, the system is progressing well and has proven effective both in promoting version updates and confirming the return of active users to mature game titles. About the second question on margin and cost structure, the decrease in cost of revenues is mainly attributable to a 27.2% year-over-year decrease in revenue sharing fees and content costs. The year-over-year decrease in revenue sharing fees is primarily due to decreased livestreaming revenue and a small decline in overall revenue sharing ratio. Since the beginning of this year, we have been implementing more sustainable operating strategies that guide livestreaming users to spend rationally. We have focused on improving operational efficiency to improve revenue quality by reducing poor revenue-generating operations. As a result, revenue sharing ratios have declined for two consecutive quarters. We expect our overall revenue sharing ratio to remain at a current healthy level with only slight fluctuations between quarters as we further adjust our revenue-generating operations. The decrease in content costs was mainly driven by lower copyright fees, optimization of streamer payroll, and reduction in self-produced content costs. The reduction in copyright costs stemmed from our ceasing of certain large-scale tournament content rights, such as the LPL. In terms of streamer payroll, we have continuously optimized our streamer resources across some segments, leading to a year-over-year decrease in the second quarter. On the self-produced content front, using a variety of methods to reduce costs—such as resource integration and joint operations—we continue to focus on improving content quality rather than quantity. As a result, we were able to launch more self-produced tournaments while lowering production costs on a year-over-year basis. Looking forward, we will prudently evaluate our procurement decisions for large-scale tournaments to optimize our streamer payroll structure and increase our investment in self-produced tournaments and PGC content for which we control the related production costs. We expect a certain degree of decrease in our content costs this year. Overall, we expect our gross margin to improve at a modest pace throughout the year 2022.

Lingling Kong, IR Director

Thank you. Operator, we are ready for the next question.

Operator, Operator

Thank you. The next question comes from Brian Gong with Citigroup.

Brian Gong, Analyst

I will translate myself. Thank you, gentlemen, for taking my question. We have recorded a decent decline in our operating expenses this quarter. What are the drivers behind this, and what are the opportunities in the second half of this year and beyond? Thank you.

Hao Cao, Vice President of Finance

In the second quarter, overall operating expenses decreased on a year-over-year basis, among which sales and marketing expenses showed a significant decrease compared to the heightened promotional expenses for new products and features in the same period last year. Currently, we are performing continuous and cost-efficient data analysis to select appropriate promotional channels to increase marketing efficiency. We expect our promotional costs to remain at the current level for the foreseeable future. Besides the aforementioned marketing expenses, a major component of our operating expenses is payroll. This quarter, we adjusted and optimized our staff structure according to evaluations for each division. Overall, we achieved a certain level of cost savings on payroll expenses year-over-year. For the remainder of the year, we will further optimize payroll and operating expenses while ensuring stable business operations, allowing us to gradually realize a narrowed net loss. Thank you.

Operator, Operator

Thank you. That’s all the time we have for questions. I will now turn the call back over to management for closing remarks.

Lingling Kong, IR Director

On behalf of the management, thank you for joining our call. We look forward to speaking with everyone next quarter.

Operator, Operator

Thank you. That does conclude the call today. Thank you everyone for attending. You may now disconnect your lines.