Earnings Call Transcript - DOYU Q3 2021

Operator, Operator

Good morning and good evening, ladies and gentlemen. Thank you and welcome to DouYu International Holdings Limited Third Quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. We will be hosting a question-and-answer session after management's prepared remarks. I will now turn the call over to the first speaker today, Lingling Kong, Buyer Director at DouYu. Please go ahead.

Lingling Kong, Buyer Director

Thank you. Hello, everyone. Welcome to our Third Quarter, 2021 earnings call. Joining us today are Mr. Shaojie Chen, Chairman and 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 website at ir.douyou.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 provisions 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 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 express qualified in their entirety by the cautionary statements, risk factors, and details of the Company's filing with the SEC. The Company undertakes no duty to revise or update any forward-looking statements for 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. In the third quarter, we made solid progress in exploring new growth drivers for user traffic and revenue generation, while maintaining steady developments. Total net revenues were RMB 2.35 billion and quarterly average paying accounts raised to RMB 7.2 million. Notably, our average mobile MAUs for the quarter sustained the growth momentum from the previous quarter reaching RMB 61.9 million, representing a 3.9% year-over-year growth. Two key factors drove our continued year-on-year growth. First, as mentioned in our last earnings call, we continue to benefit from the broadcasts of several large-scale eSports tournaments such as the LTL Summer 2021. This broadcast not only attracted new eSports users but also galvanized inactive users to return. Second, we deepened our collaboration with Top-tier game developers, while also increasing our investments in new game content. In the 4th quarter, we partnered with a wide range of developers to bring more new games to our platform while strengthening our promotional and operational efforts on this new game. For example, during the quarter, we introduced two mobile games, including Battle of Golden Spatula. Through a series of content and operations-related activities, we collaborated with game developers in the launch and marketing phases for this game. We recorded livestreamers to create quality content for these games, which effectively highlighted each game's features, utilizing various game console formats. We successfully attracted many livestreamers and regular gamers to our platform. Now, turning to our content updates. The solid foundation of our comprehensive content ecosystem underlies our user base expansion. In the quarter, we continued to engage our highly comprehensive content library, which expanded game genres. Our aim is to generate personalized content for each game, to cater to a variety of user needs, refine our path on operations, and create a wide range of game-centric content community for our users. To elaborate, in the domain of large-scale eSports tournaments, we maintained our close partnerships with developers and continued to provide high-quality eSports content. We fostered collaboration between our top creators and our eSports content. Focusing on live content as a core operation for large-scale eSports tournaments, we've provided multichannel sessions and in-house content to meet the wide interests of our users. In the quarter, we forecasted over 60 large-scale eSports tournaments and produced over 70 eSports tournaments in-house. Notably, we forecasted the summer LTL 2021 tournaments, which is the highest-level League of Legends professional tournament in China, with the highest quality content produced in-house. On the mobile front, we've successfully attracted new mobile users with operational and marketing initiatives. Moreover, for the Elite League of 2021, we invited a number of influencers to participate and improve the overall viewing experience. Meanwhile, for the CFML Summer 2021 tournament, we collaborated with game developers to launch promotional programs, featuring high-value in-game items to drive new growth. This strategy yielded engagement and improved the viewing experience. Furthermore, we attracted new users and galvanized the engagement of all users through marketing campaigns around our self-produced eSports events, such as League of Legends, China vs. South Korea. During these large-scale eSports tournaments, we also incorporated an on-demand playback function and produced a series of relevant video clips and community discussions to further enhance user engagement. For non-eSports games, we endeavored to cover more game genres. Additionally, we cooperated with game developers and strengthened the operation of each game's full life cycle. Given that non-eSports gaming content is better viewed in graphic and video format, we upgraded our product features with a combination of live streaming, graphics, and community interactions to attract more high-quality gamers to our platform. In addition, we're continuing to refine our operations, hold relevant discussions, and guide interactive discussions among developers to immerse content creators and users. Through our high-quality content and optimized product features, we are able to enhance various links for entertainment, learning, and interaction, which is attracting more users to our platform. More importantly, we have made good progress in our operating strategy for each segment, including live streaming, video, graphics, and community, especially for our recent launch of non-eSports games. Turning to our flagship game launch in the last quarter, Naraka: Bladepoint, it returned to its growth trajectory in the third quarter, showcasing high user engagement on our platform. For other new games launched this quarter, such as Battle of Golden Spatula, they also performed well based on global user engagement and increasing live streaming volume. These improvements are the results of our continued commitment to supporting top-tier streamers, customizing content offerings, optimizing our segment operations, and upgrading our platform with more interactive product features. During the quarter, we committed additional resources to our research and development capabilities to augment our content production efficiency. We launched a new content production feature and a one-click video production function in the training room on our website. With these two updates, users can easily add the latest two minutes of streaming sessions and upload the additional content to our community segments. We expect that this update will increase UGC content creators’ engagement and stimulate interactions within our communities. Going forward, we will continue to execute our game-centric content ecosystem strategy. We will enrich our offerings of game content to meet the diverse needs of our users and attract more users through refining our operations of new and existing popular games. Now, turning to monetization, in the third quarter, our quarterly paying users totaled 7.2 million, with revenue of RMB 307. We sustained the size of quarterly paying users as we continued to execute our proactive offering strategy to improve user engagements and paying user consumption. We also keep exploring new monetization avenues while maintaining stable revenue contribution from the traditional model. Let me also touch briefly on our development in overseas markets. DouYu remains one of the top-ranking mainstream video game live streaming apps in Japan for the last two quarters according to app earnings. Given that video gaming is achieving scale, we enhanced our monetization efforts during the quarter and made meaningful progress. In the future, we will further solidify our market position in Japan and strengthen the monetization capabilities of our platform by optimizing operation efficiency to maintain healthy growth. In summary, during the fourth quarter, we made significant strides in exploring new growth initiatives while maintaining the steady development of our corporate analysis. Building on our industry leadership in live streaming, we deepened our collaborations with game developers across multiple dimensions, providing gamers and users with comprehensive game content offerings. We will continue to explore diversified monetization models and improve our financial performance through effective product investments, consumer engagement, and content operations. 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

Thanks. Good evening. Hello, everyone. Revenues in the third quarter of 2021 were RMB 2.35 billion, live streaming revenues were RMB 2.21 billion, compared with RMB 2.35 billion in the same period of 2020. Our live streaming business remained relatively stable under our long-term sustainable operating strategy. The year-over-year decrease in live streaming revenue was due to several notable fan engagement initiatives we launched in the summer of last year, which led to increases in paying user conversion, resulting in a higher revenue base for comparison. This decline was partially offset by organic growth of average revenues per paying user, driven by the implementation of more effective operational strategies. Advertising and other revenues were RMB 137.5 million compared with RMB 197.8 million in the same period of 2020. The decrease was primarily due to trial testing of our new commercialization model, where we redirected a portion of our advertising traffic to monetize our traffic through traditional advertising channels. As a result, we forfeited some potential short-term revenue gains to improve sustainable long-term growth. Bandwidth revenues in the third quarter of 2021 decreased by 5% to RMB 2.07 billion from RMB 2.18 billion in the same period of 2020. More specifically, revenue sharing fees and current costs decreased by 5.6% to RMB 1.84 billion from RMB 1.95 billion in the same period of 2020. The decrease aligns with the decrease in live streaming revenues. This decline was partially offset by higher spending on e-sports tournament broadcasting rights and additional investments in proprietary content production as we continued to invest in high-quality gaming content. Bandwidth costs in the third quarter of 2021 decreased by 3.4% to RMB 163.4 million from RMB 169.1 million in the same period of 2020. This decrease was mainly due to lower bandwidth costs benefiting from improved procurement efficiency with major suppliers and possibly due to lower bandwidth costs as a result of continued technology upgrades in-house. Gross profit in the third quarter of 2021 was RMB 278.5 million compared with RMB 369.4 million in the same period of 2020. Gross margin in the third quarter of 2021 was 11.9% compared with 14.5% in the same period of 2020. This decrease was primarily due to the decline in revenues exceeding the decline in revenue sharing fees and content costs. Sales and marketing expenses in the third quarter of 2021 were RMB 218.9 million, an increase of 36.6% from RMB 160.3 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 third quarter of 2021 were RMB 123.2 million, representing an increase of 12.4% from RMB 109.6 million in the same period of 2020. This increase was primarily due to increased investment in technical personnel to support our overseas expansion and knowledge infrastructure upgrades aimed at enhancing our user experience. The calculated loss from operations in the third quarter of 2021, excluding share-based compensation expenses, was RMB 91.0 million, compared with an adjusted operating income of RMB 71.2 million in the same period of 2020. Net loss in the third quarter of 2021 was RMB 143.5 million, compared with net income of RMB 59.6 million in the same period of 2020. Adjusted net loss in the third quarter of 2021, which excludes share-based compensation expenses, share of income in equity method investments, and impairment loss of investments was RMB 72.7 million compared with adjusted net income of RMB 98.7 million in the same period of 2020. The basic and diluted net loss per ADS in the third quarter of 2021 were RMB 0.37, while adjusted basic and diluted net loss per ADS were RMB 0.16. As of September 30, 2021, the Company had cash and cash equivalents, restricted cash, short and long-term bank deposits totaling RMB 7,078 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, where the Company may repurchase up to US$100 million of its shares until August 2022. As of September 30, 2021, the Company had repurchased an aggregate of $4.3 million worth of its ADS under this program. We have continued to increase our monetization capabilities 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. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Operator, Operator

Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. Our first question is from Lei Zhang of Bank of America. Please go ahead.

Lei Zhang, Analyst

Thanks management for taking my question. Two questions here. First, on regulations, do you see any impact from the recent game approval process? How should we look at the regulatory changes going forward? That comes mainly on our corporation, which holds in the agency. Do we see an increase in the live-streaming hosts set and adding revenue sharing ratio across your major tiers? How should we look at our revenue going forward? Thank you.

Shaojie Chen, Chairman and CEO

First, regarding your first question about the suspension of new games. The short answer is, we have not seen any significant impact on our existing users. In terms of regulations, there are two main areas we need to address, one being the suspension of new game launches. This could have a slower impact on new user acquisition. However, we believe that the expansion of new games will lead to higher-quality games being launched into the market, which will benefit us and the gaming industry in the long run. Recently, we have seen high-quality new games launched on our platform, such as Battle of Golden Spatula, showing encouraging operational metrics. Regarding the competitive landscape and revenue sharing, our current contracts with streamers will not be affected by other competitors in the industry raising their revenue sharing percentage. Since the number of streamers available in the industry is quite limited, it is hard for new entrants to establish a competitive ecosystem. Additionally, with streamers already under contract, we see the current competitive landscape remaining stable. Overall, we don't expect new competitors to attract high-quality streamers by merely increasing their revenue sharing fees, especially in promoting new games. We collaborate with talent agencies to bring in numerous streamers, ensuring we have the quality and quantity needed for new game content offerings. In terms of revenue sharing, we offer certain incentives to streamers during promotional periods, meaning the revenue sharing ratios may fluctuate from quarter to quarter. However, we believe our current revenue sharing ratios are reasonable, and we will adjust them according to industry dynamics going forward. Thank you.

Lingling Kong, Buyer Director

Great, thank you.

Operator, Operator

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

Thomas Chong, Analyst

I think the question that we are seeing is that the online video platform and short-form video are also investing in the live streaming internet. So, I just want to see how we should think about the competitive landscape and how we can adapt moving forward? My second question is, with regards to the newly launched games in the market, which ones are performing better and any data can be shared? Thank you.

Shaojie Chen, Chairman and CEO

Thank you for your questions. Regarding the competitive landscape, since the fourth quarter of this year, we do not see significant changes in the competitive landscape in the game live streaming industry. The streamers are currently prohibited from moving between platforms under their contracts, leading the competition to remain stable. We have observed that short video platforms have been expanding in today's game live streaming sector, generating more traffic and potentially attracting a more diverse audience to the live streaming market, increasing the overall market size for the gaming industry. To address these changes, we upgraded our content ecosystem, including video and communities, and established a comprehensive content library that covers a wide range of game genres. Our strategy remains game-centric, leveraging our strong understanding of the industry and our experience accumulated over the past few years. We will continue to engage our content offerings to build a thriving community and attract more users to our platform. We are also deepening our cooperation with game developers to cover more game genres and expanding our content coverage to include non-eSports games. This integration will enhance the interactions between users and content creators on our platform, and by offering more high-quality content, we will reinforce our leadership position as a game-centric integrated content platform in China.

Hao Cao, Vice President of Finance

To address your second question, we have seen strong momentum in several games launched this year, including the game launched in September. In the month following its launch, live streaming volume and user engagement increased significantly. These games not only continue to perform well but also gained popularity, improving their rank among all games on our platform. Our operations have generated notable results and attracted many new users to our platform. Additionally, we maintain a leadership position in terms of the number of top streamers, live streaming volume, and user engagement for these new games. We have enhanced the marketing of each game segment by integrating live streaming, video clips, and community interactions to meet various user needs. We leveraged our top market tools to build anticipation and excitement among consumers before the launch of these new games, recruiting new streamers to ensure the quality and quantity of content offerings. We also promoted these games to attract more users.

Lingling Kong, Buyer Director

Operator, next question.

Operator, Operator

Thank you. The next question is from Lee Wen Zhang of China Renaissance, please go ahead.

Lee Wen Zhang, Analyst

Thanks for taking my question. I have two questions. Firstly, regarding performance on our platform, what can we expect this year with the upcoming large title releases? Secondly, how do you see the performance of tournaments contributing to our metrics and revenue this year?

Hao Cao, Vice President of Finance

Regarding mobile gaming, we have accumulated experience from our operations on the PC version, and we have integrated our operational approach for mobile games. The users of our PC version will be the first batch of users for the mobile version. Throughout our operations of various games, we have maintained high conversion rates from PC players to mobile users. This reflects that League of Legends is highly suitable for live streaming. The launch of League of Legends mobile will further galvanize the return of our older players, encouraging them to engage with content on our platform. Given the ease of play of League of Legends mobile, we expect increased viewer engagement and content consumption on our platform. Additionally, our top streamers will aid in promoting this mobile version, as they will also livestream it. Our long-term collaboration with Tencent enables us to effectively integrate promotional efforts to drive excitement and engagement around League of Legends mobile. Regarding our performance metrics from tournaments, such as the LOL World Championship, this is the largest official annual tournament, consistently attracting a large number of viewers. Our operations for this tournament have included live streaming content in various formats and editing programs to enhance viewer experience. By implementing an on-demand playback function, we've produced video clips and fostered community discussion to improve user experience. This optimized viewing experience has attracted premium users to our platform. The viewer engagement for the LOL World Championship is projected to be significant, as we expect total interactions to approach a billion. The engaging content we offer continues to appeal to our user base. Thank you. Next question.

Operator, Operator

Thank you. The next question is from Daniel Chen of JP Morgan. Please go ahead.

Tim Chen, Analyst

I will translate myself. Thank you, Management, for taking my questions. I'll ask you two questions on behalf of Daniel. Firstly, you mentioned that the Company is seeking additional ways to diversify monetization by leveraging some traditional advertising resources. Can you give us some more color on the current progress and your expectations on that? The second question, can you brief us on the progress of the $100 million share repurchase program?

Hao Cao, Vice President of Finance

Regarding your first question, we generate advertising revenue by offering game and brand advertising. Our brand advertising revenue has remained stable, driven by consistent user traffic on our platform. We are implementing new monetization strategies for certain game advertisements. To optimize traffic, we reallocated some of our advertising banners and resources towards our new monetization model. We have collaborated with premium advertisers to explore new opportunities. Our new model connects game developers with live streamers, allowing developers to launch promotional campaigns while streamers have the flexibility to choose their promotional methods. By implementing this smart distribution system, we hope to boost receptiveness in game downloads and activations. We have rolled out a number of initiatives to support this goal, including handy features for streamers encouraging users to download and activate games. We have also implemented incentive plans connected to promotional effectiveness for our streamers. If this develops well, we believe it will enable us to leverage user traffic better and generate more value for games while diversifying income sources for our live streamers. This system should enhance our monetization potential. Regarding the share repurchase program, we announced a $100 million share repurchase program for a period of up to 12 months. As of September 30, 2021, we had repurchased $4.3 million worth of ADS on the open market. We initiated the share repurchase immediately after the announcement and have been actively executing our program. We've appointed professional institutions as required by regulation to oversee our share repurchase schedule. Subject to market conditions, we will continue to provide updates in the coming quarters.

Lingling Kong, Buyer Director

Operator. Next question, please.

Operator, Operator

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

Alex Poon, Analyst

My first question is regarding our Cloud gaming business. Can we get some updates and future expectations for the business? My second question is regarding our overseas business. How is the performance in the third quarter? What do we expect going forward?

Hao Cao, Vice President of Finance

After more than a year of exploration with our partners, the product features of our Cloud gaming service are largely complete. In this quarter, we have also updated the product, such as Grand Theft games on the Android mobile play store. We believe Cloud gaming presents a new development opportunity for the gaming industry. However, we face several challenges, including copyright issues and cultural adaptations. We are well-positioned to capture growth opportunities in the evolving gaming industry. Regarding our overseas markets, our strategy has been to acquire user traffic before monetization. Over the past few quarters, our domestic business in China has been profitable, which means the majority of our investments have focused on overseas markets, especially in Japan. According to App Annie, we have maintained a top position in video game live streaming apps in Japan for the last two quarters. User growth has been sustainable and healthy. As we increase our user base in Japan, we will gradually shift our strategy from user acquisition to traffic monetization. We are continuously improving our operational efficiency and successfully reducing our losses in overseas markets.

Shaojie Chen, Chairman and CEO

Thank you for your questions. I would like to conclude by saying we are committed to creating an integrated platform that not only attracts users but also retains them through a rich ecosystem of content, robust community features, and valuable partnerships. As we move forward, we remain optimistic about our potential to drive profitable growth and further enhance the value we provide to our users and stakeholders. Thank you.

Lingling Kong, Buyer Director

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

Operator, Operator

Thank you. That concludes the call today. Thank you everyone for attending, and you may now disconnect.