Earnings Call Transcript - DOYU Q1 2021

Operator, Operator

Good morning, and good evening, ladies and gentlemen. Thank you, and welcome to DouYu International Holdings Limited's First Quarter 2021 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. Please note, this call is being recorded. I will now turn the call over to the first speaker today, Ms. Mao Mao, Vice President of Capital Markets of DouYu. Please go ahead, ma'am.

Mao Mao, Vice President of Capital Markets

Thank you. Hello, everyone. Welcome to our first quarter 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 first quarter 2021 financial results on our IR website at ir.douyu.com. You can also check a replay of this call when it becomes available in a few hours on our IR site.

Hao Cao, Vice President of Finance

Thank you, Mao Mao. Hello everyone. Total net revenues in the first quarter of 2021 were RMB2.15 billion. Live streaming revenues were RMB2 billion, compared with RMB2.11 billion in the same period of 2020. Advertising and other revenues were RMB154.1 million, compared with RMB165 million in same period of 2020. The year-over-year decrease in live streaming revenues was mainly due to the reversion of the user's tipping behavior to that of the pre-pandemic levels, as the pandemic was gradually brought under control in China. This decline was partially offset by our implementation of more effective operational strategies, which helped to improve the engagement level and paying behavior of key paying users on our platform during the period. The year-over-year decline in advertising and other revenues was mainly due to advertisers normalizing their marketing expenditures, which were relatively higher in the same period last year due to the COVID-19 pandemic. As China has gradually brought the pandemic under control, advertisers' expenditures have also returned to their pre-pandemic level. Total revenues in the first quarter of 2021 increased by 5.6% to RMB1.89 billion from RMB1.79 billion in the same period of 2020. More specifically, revenue channel fees and content costs increased by 5.4% year-over-year to RMB1.66 billion. This was due to the company's increased investments in the broadcasting rights for eSports tournaments, in-house production of proprietary content, and the quality streamers in the overseas market.

Operator, Operator

The first question is from Daniel Chen of JPMorgan. Please go ahead.

Daniel Chen, Analyst

I will translate myself. My first question is on the first quarter mobile MAU. We have seen a slowdown in the growth rate to 4.5% year-over-year. So what's the reason behind? My second question is on the overall user engagement level. In the first quarter, we are launching some of the new business models such as short video. So what is the implication for the overall user behavior? Thank you.

Mingming Su, Chief Strategy Officer

Thank you for the question. The year-over-year increase in MAU in the first quarter was mainly due to broadcasting major tournaments and self-produced tournament contenders. It was also caused by further diversification of content in our video and community segments, which had a positive impact on our user base. However, the pandemic recovery has led to lower year-over-year growth in our mobile MAU compared to the record growth in the same period last year during the pandemic. In the long term, we expect our PC MAU to remain stable. Mostly, user growth will be driven by mobile sites. In fact, we believe there are plenty of opportunities in the mobile market as moderate and lighter game user growth are still underpenetrated. In the future, we will continue to improve our content development system for live streaming video and community businesses to nurture the steady growth of our mobile MAU. And as for the second question, user behavior is consistent with the trend we have seen over the past few quarters. Our platform continues to be highly engaging for users. Today, the average active user retention rate remains about 75%, which is stable in comparison with the previous program. Our user behavior data shows that as the number of years users spent on our platform increases, their average monthly time spent on our platform also increases. This shows the curve remains consistent for users who joined us at different times, as they gradually become high-quality and loyal fans over time. As our video and community business demand starts to grow, our user data shows that the amount of time spent by each user on our recorded and video segments also increased quarter-over-quarter. This demonstrates the effectiveness of our video businesses in retaining users and converting them into loyal users. Thank you.

Daniel Chen, Analyst

Thank you.

Operator, Operator

The next question is from Lei Zhang of Bank of America. Please go ahead.

Lei Zhang, Analyst

Thanks management for taking my questions. Two questions here. First, any updates on the merger deal with Huya and what is the impact from the tightening of antitrust regulation? Secondly, can you give us more color on the video and community new initiatives we launched last year? And for the Weibo business, how should we compete with Weibo players? Thank you.

Shaojie Chen, CEO

Regarding your first question on the merger program, firstly, the potential merger between us and Huya is on track. We believe that the timing of this deal to be closed depends on the approval process by the relevant Chinese regulators. With the rapid development of the domestic internet industry over the past few years, we have seen that the authorities have gradually improved industry policies and regulations. We believe that the antitrust regulations are in line with the government's goal of promoting a fair competition environment among internet companies, encouraging a level playing field across the industry, which will help support our long-term development. While the entire entertainment segment faces fierce competition at this stage, we also believe that we have the potential to further improve both our user skills as well as revenue size. The goal of our merger is to further integrate the high-quality resources on both sides to improve our operational efficiencies and increase the overall value of the combined platform, ultimately unlocking greater growth potential in the future. As for your second question on our video and community business, since last quarter, we have continued to diversify our content categories through these two new business segments. As we mentioned earlier, we established a pyramid content structure for our video business. At the top is our top-tier video content, which contributes significantly to our viewership, including video programs that we self-produced and tailored for streamers. In the mid-tier level, we have hosted large scale self-organized events, such as the DouYu Video Contest Spring Season, to maintain a steady supply of high-quality content and double the number of daily active video content creators on our platform on a differential basis. To date, we have accomplished our near-term goal of establishing a stable supply of content for all mainstream video categories on our platforms. Going forward, combined with continuous content enrichment and targeted promotional activities for users, we expect our video viewership to further improve. Regarding the community business, we launched functions such as one game to promote more activities among users. Our users spontaneously developed their own player circles for different popular games, such as Honor of Kings for game discussion and social purposes. Additionally, many professional tournament media outlets have joined our community and produced large volumes of exciting reports during tournament periods, further diversifying our content and contributing to an engaging community environment. As a large community with the greatest density of players, our community naturally grows into an effective marketing and promotion channel for game developers. For this quarter, we helped present and introduce over 30 different console and mobile games, successfully converting a significant number of users into game players. On the last question regarding differentiation in the video business, as a leading game-centric integrated content platform in China, we have already established a relatively high barrier for both top-tier live streaming content as well as quality streaming resources. During the quarter, we gradually fostered organic synergies between live streaming and video content. We leverage our strengths from the live streaming business in user engagement and monetization, encouraging more video content creators to live stream on our platform and helping them increase their overall income. By utilizing features like UI chat, we also improve user engagement. At the same time, we recognize the advantages of video in content distribution accumulation as well as extension. We encourage our streamers to enhance their platform influence by building video content profiles on our platforms. Furthermore, we have also gradually established connections between our video and community businesses. In our community, we attracted and established close partnerships with a large number of game developers and professional tournament media online, collaborating with many official game accounts to produce high-quality original content that improves our influence in the gaming industry. While users watch our high-quality original game content, we provide them with opportunities to directly interact with game developers and tournament media online. This helps to improve user engagement and participation. Next question please.

Operator, Operator

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

Feiya Zhao, Analyst

Thanks management for taking my questions. I have three questions. First, we noticed that we have signed 5-year exclusive media rights with LTL. So what's the impact of those? Are you going to incur additional content costs? Second question is what is the sequential growth of the broadcasting rights cost? Lastly, could you please elaborate more on the reason for the sequential decline of live streaming revenue? Thanks.

Shaojie Chen, CEO

Thank you, Feiya. For the Legends Pro League, we expect to broadcast this tournament as well. In terms of broadcasting official tournaments, our contenders will not experience any negative impact. As the renter of our most popular games segment, League of Legends, has a larger pool of female streamers and loyal game players, as well as different tiers of streamers and content types. We believe that we will be the go-to platform that users choose first to watch the tournament. Moreover, we are planning to develop a multi-angle tournament experience for users by generating game content through our video, community, and live streaming segments, providing users with more engaging tournament viewing options. We believe our League of Legends segment will contain content, creativity, and industry leadership while continuing to generate greater user traffic.

Hao Cao, Vice President of Finance

Regarding your question on expenditures, in the first quarter of 2021, broadcasting rights costs decreased on a sequential basis. This was due to the fact that we amortized most of our broadcasting rights cost for the League of Legends championships in the first quarter of 2020. In the first quarter of 2021, our broadcasting rights costs returned to regular levels. As a leading game live streaming platform in China, we are committed to enriching our content categories and improving our content quality. We will continue to purchase broadcasting rights for quality eSports tournaments. As new game titles continue to increase and our platform's tournament category coverage improves, the absolute amount of broadcasting rights will also continue to increase at a steady pace for this year. Regarding live streaming revenues, the first quarter, which includes the Spring Festival holiday, is traditionally the off-season. During this period, streamers usually choose to spend more time with their families, resulting in overall live streaming volume being generally at its lowest for the year. The overall number of paying users also declined in the first quarter of 2021. Although we were affected by seasonal factors, we maintained an active and effective operating strategy to stimulate our core paying users' interactions and purchasing willingness, helping to create a sequential increase in our Average Revenue Per Paying User (ARPPU). Going forward, we will continue to improve this segment's monetization efficiency by refining operations. Furthermore, we will deepen our collaborations with talent agencies to customize monetization products, increasing the income and monetization efficiency of our mid-tier streamers. Thank you.

Operator, Operator

The next question is from an analyst at HSBC. Please go ahead.

Unidentified Analyst, Analyst

Thank you for taking my question. Two questions. First is for the revenue sharing ratio. Can management comment on the drivers behind it and what would be the trend going forward? And second, is sales and marketing counted as a G&A expense? Basically comment on the changes in both, and what the trends will be going forward. Thank you.

Shaojie Chen, CEO

We will maintain our 50 to 50 revenue split ratio policy for our platform and streamers, as well as our platform and talent agencies. During promotional periods, we will offer certain incentives to streamers and talent agencies. Therefore, while the overall revenue sharing ratio may fluctuate slightly quarter-over-quarter, it will remain stable in general. As a game-centric live streaming platform, we will continue to invest in content related to eSports games and potential blockbuster titles, especially for top eSports tournaments and premium self-produced content. At the same time, we will actively enhance our overseas streamer resources and enroll new streamers in new game segments. Overall, our content costs will show an upward trend. Sales and marketing expenses include staff salaries, channel promotion costs, sponsorship fees, and expenses for both offline and online activities. In the first quarter of 2021, sales and marketing expenses increased on a sequential basis. This increase was due to heightened investments in user promotional activities, in line with the development of our new businesses, including video and community. We are quite positive about the development of the eSports industry in the long run and we will continue to increase our investments in eSports-related activities and eSports team sponsorships going forward. Meanwhile, we intend to upgrade our product features to improve traffic conversion efficiency. Therefore, we expect our sales and marketing expenses to increase steadily. In the first quarter of 2021, general and administrative expenses decreased on a sequential basis, primarily due to the fact that most of our merger-related professional services fees were incurred in the first quarter of 2020. These expenses have already returned to their regular levels by the first quarter. Moving forward, we expect general and administrative expenses to grow at a slow and steady rate. Thank you.

Operator, Operator

The next question is from Sabrina Chong of Jefferies. Please go ahead.

Unidentified Analyst, Analyst

Are we expecting a rising trend of business monetization events for our users related to our platform for eSports? Thank you.

Mingming Su, Chief Strategy Officer

Thank you for your question. According to our platform data, our official tournament viewership has increased steadily, especially for larger scale official tournaments like LPL Spring. We have launched interactive events in major headlines and customized videos. We have also introduced unique live streaming rooms through which commentators can live stream during tournaments. Our broader portfolio of initiatives has helped to increase users' viewing options and engagement, leading to a year-over-year increase in our overall user base and number of acquired users. Today, we already have a relatively complete major broadcasting system for official tournaments. We also continue to innovate in content through surrounding programming. As a result, we believe that we can attract more high-quality new users to our platform moving forward. Our users have shown more loyalty to high-quality live streaming content compared to others. With our competitive live streaming content and resources and our pool of top and mid-tier streamers, we maintained a strong competitive barrier relative to others in the industry. Therefore, despite some large scale eSports tournaments choosing to broadcast on multiple platforms, we haven't seen any traffic diversion occur on our platform. Thank you.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Mao Mao, Vice President of Capital Markets

Thank you for joining us today. Have a good day.

Operator, Operator

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