DouYu International Holdings Limited

Good morning and good evening, ladies and gentlemen. Thank you and welcome to DOEU International Holdings Limited's third quarter 2020 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. Please note, today's event is being recorded. I will now turn the call over to the first speaker today, Ms. Mao Mao, Vice President of Capital Markets of DOEU. Please go ahead, ma'am.

Thank you, operator. Hello, everyone. Welcome to our third quarter 2020 earnings call. Joining us today are Mr. Shao Jiechen, Chairman and Chief Executive Officer, Mr. Mingming Su, Chief Strategy Officer, and Mr. Hao Cao, Vice President of Finance. You can refer to our third quarter of 2020 financial results on our IR website at ir.souyu.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, uncertainty, 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 statement, risk factors, and details of the company's filing with the SEC. The company undertakes no duty to revise or update any forward-looking statement for selected events or circumstances after the date of this conference call. Now I will speak on behalf of our Chairman and CEO, Mr. Shao-Jie Chen. Overall, our financial and operational results maintain their stable growth rate in the third quarter of 2020, with our total net revenues increasing by 37.0% year-over-year to RMB 2.55 billion. we also achieved the seventh consecutive quarter of positive non-GAAP net income. At the same time, our average mobile MAU count maintained its robust growth trajectory, increasing by 14.4% year-over-year to 59.6 million, while our quarterly paying users also grew by 12.7% year-over-year to 7.9 million during the quarter. Despite the lingering effects, of COVID-19 and broader macro uncertainty throughout the country, users continue to flock our esports-centric game live streaming platform for its vibrancy and instrument. Our total average MAUs reached 194 million during the third quarter of 2020, which was attributable to five factors. First, by strengthening our collaboration with Tencent's game team, we added more users especially those users on the PC platform. Also, our broadcast of large-scale esports tournaments, such as the LPL 2020 Summer Tournament, helped expand our user base while engaging those previously inactive users at the same time. In addition, new game launches attracted a wave of brand new users to our platform during the third quarter. The summer holiday boosted students' viewership and contributed to the positive sustainability impact. Above all, our continuous refinement of platform operations has enabled us to seize opportunities emerging from esports events and tournaments and helped us to achieve steady growth in all of our operating matrix. For our content ecosystem, we continued to enhance our game-centric esports platform increase the content breadth and depth in every segment of our platform, develop a variety of innovative content formats, and expand our coverage up and down the esports industry value chain. During the quarter, we achieved superior results in investing high-quality esports teams. For example, our sponsored League of Legends teams, such as TES, LGD, and JDG, or advance to the LPL 2020 Summer Playoff Series. Notably, TES won the LPL 2020 Summer Championship. Moreover, our newly signed PUBG team, CoC, emerged as the Dark Horse team of 2020 and won the runner-up place in its inaugural participation in this year's PCL Summer Tournament. Meanwhile, we further deepened our collaboration with Tencent and other game developers and publishers, and successfully broadcasted more than 50 large-scale official esports tournaments during the quarter. For example, we obtained the exclusive broadcasting rights for Amiga League, which was one of the largest professional championships for Dota 2 in the world, thus further augmenting our platform's brand influence. In addition, we self-produced more than 50 high-quality esports tournaments during the period. Most notably, we organized the 10th consecutive production of our proprietary esports event, Golden Grand Tournament, which has grown into one of the largest PUBG tournaments in China. As we continued to innovate our business model, we improved our user experience significantly by launching the beta version 2.0 of Cloud Game, which has a brand new UI design as well as optimized server functionality and compatibility. Going forward, we plan to explore further into cloud games. Also, as we almost completed the design and development of the mobile application for pre-recorded game videos, we were able to rotate pre-recorded game broadcasts with live streamed game content, provide a more diverse supply of content to our platform, expand our coverage of various user scenarios and stimulate our user engagement. On the streamer's front, we continue to improve our efficiency in managing and monetizing the mid-tier and long-tail streamers during this period. We are glad to see that it has become a norm for our partner talent agencies to proactively uncover and groom new streamers. Also, revenue contributions from our mid-tier and long-tail streamers has been increasing continuously. In addition, by recruiting the new non-game streamers to our platform, we have been able to cover a broader array of user demographics. Looking ahead, we shall continue to execute our game content-centric growth strategies, engage more game users through diverse content, capture user addition opportunities born out of new game title launches, satisfy a wider range of user viewing demands through supplementation of non-game content, proactively explore new business models and invest in those areas aligned with our long-term strategy. In terms of monetization, as we continued to refine and optimize our interactive product functionality, we were able to grow our quarterly paying users by 12.7% year-over-year to 7.9 million, and our paying ratio to 4.1% during the quarter. Meanwhile, our ARPU also increased by 25.2% year-over-year to 297 RMB. In addition, to solidifying our existing users' paying habit, we wrote out additional innovative initiatives to add more paying users and lay a solid foundation for our sustainable growth in both paying users and overall revenue. Looking ahead, we will continue to explore new product functionalities and revenue models, enhance our platform's overall operational efficiency, and advance the monetization capabilities for every platform segment or even every live streaming room. At the same time, we will bolster our management in the design and production of large scale events to promote monetization consistency. On the research and development front, we continue to invest in our technology development capability during the quarter. With our support for the display function of the more efficient video compression technology, HEVC, our users can enjoy videos of the same viewing quality with only half of the previously required bandwidth, thus leading to a smoother viewing experience, especially for our mobile users. As we continue to implement the display functionality of Edge 265 across our platform, we foresee more room to optimize our bandwidth class In addition, we rolled out the real-time playback function at a large scale on our platform. By leveraging AI technology to accurately tag key game moments, such as kills and team brawl, we enabled our users to replay precisely the moment of their choice, thus significantly improving their viewing experience. On the globalization front, we continued to increase in our investment and exploration in the Japanese market. As we made further improvement to the product functionalities and content varieties of our Japanese live streaming platform, Mildom, it was able to maintain a steady growth trajectory. In summary, during the quarter, we sustained our continued growth and exploration in our user-based expansion and the content ecosystem development. Looking ahead, We plan to further build out our game content-centric platform, deploy resources both up and downstream the esports industry value chain, bolster our operational performance, ramp up our R&D efforts, and optimize our user experience. Furthermore, we remain committed to upgrading our platform monetization capabilities, improving our operating efficiencies, and enhancing our financial performance over the long run. On October 12, 2020, we entered into a merger agreement with Huya. We look forward to working together with Huya by providing our users with high quality content and services and creating long-term value for our shareholders in the future. With that, I will now turn the call to our Vice President of Finance, Mr. Hao Cao, to go through the details of our financial performance in the third quarter.

Thank you, Momo. Hello, everyone. During the third quarter of 2020, in response to a lower than expected sales performance of certain major fan events, we took decisive action, shifting our attention in the second half of the year to the development of content and acquisition of broadcasting rights for esports games. In addition, we also maintained our focus on new and innovative ways further optimize user-streamer interactions on our platform. As a result, our total revenues in the third quarter of 2020 increased by 37% to RMB 2.55 billion from RMB 1.86 billion in the same period of 2019, with live streaming revenues in the same period increasing by 41.3% year-over-year. Meanwhile, we also improved our net revenue Our net income in the third quarter of 2020 to RMB, 59.6 million from our net loss of RMB, 165.4 million in the same period of 2019. While our adjusted net income in the third quarter of 2020 increased by 36.8% to RMB, 98.7 million from RMB, 72.2 million in the same period of 2019. Now please allow me to provide you with some more details regarding our key financial metrics. Total net revenues in the third quarter of 2020 increased by 37% year-over-year to RMB 2.55 billion, with RMB 2.35 billion in live streaming revenues and RMB 197.8 million in advertising and other revenues. Flat streaming revenues in the third quarter of 2020 increased by 41.3% to RMB 2.35 billion from RMB 1.66 billion in the same period of 2019. This increase was primarily attributable to the improved pay habits of existing users as well as our successful attraction of new paying users. resulting from our continued requirement of event mechanisms. As a result, paying users in the third quarter of 2020 increased by 12.7% to 7.9 million from 7 million in the same period of last year. In addition, improvements made to interactive features also helped to raise up user payment frequency on our platform. and drive the growth of our pub on year-over-year basis. Advertising and other revenues in the third quarter of 2020 increased to RMB 197.8 million from RMB 196.1 million in the same period of 2019, which was mainly driven by the ongoing growth of our brand recognition and the corresponding increase in demand for streamers integrated advertising and promotion solutions. Cost of revenues in the third quarter of 2020 increased by 41.2% to RMB 2.18 billion from RMB 1.54 billion in same period of 2019. More specifically, revenue share fees and accounting costs in the third quarter of 2020 increased by 48.9%. to RMB 1.95 billion from RMB 1.31 billion in the same period of 2019. The increase in revenue sharing fees and accounting costs can generally be explained by the following drivers. First, during the quarter, our revenue sharing fees increased, which was mainly due to the increases in live streaming revenues in the same period and the increased incentives given to streamers during certain major fan events. Second, our content cost increased, which was mainly driven by three factors. First, we continue to engage with quality streamers abroad to expand our footprint in overseas markets, especially in Japan. Second, we continue to focus on enriching our platform's esports-related content. And three, we purchased additional live streaming rights for esports games in the second half of 2020, which was previously delayed in the first half of 2020 as a result of the outbreak of COVID-19. Bandwidth costs in the third quarter of 2020 increased by 12.1%, to RMB 169.1 million from RMB 150.8 million in the same period of 2019. The increases to bandwidth costs were mainly driven by increases in both mobile user growth and total user engagement, partially offset by efficiency improvements resulting from technical upgrades. Cost profit in the third quarter of 2020 increased by 16.6% to RMB 369.4 million from RMB, $316.8 million in the same period of 2019. Gross margin in the third quarter of 2020 was 14.5%, compared to 17% in the same period of 2019. Now turning to our operating expenses. Sales and marketing expenses in the third quarter of 2020 decreased by 7.5% to RMB 160, from RMB 173.2 million in the same period of 2019, mainly due to the decrease in service compensation expenses recognized in the third quarter of 2019 following our IPO. Research and development expenses in the third quarter of 2020 decreased by 8.6% to RMB 109.6 million from RMB 119.9 million in the same period of 2019. This decrease was primarily due to the decrease in shares-based compensation expenses recognized in the third quarter of 2019 OEM IPO, which was partially offset by the increase in expenditures for the research and development of new products, as well as the increased headcount overseas research and development personnel during the third quarter of 2020. General and administrative expenses in the third quarter of 2020 decreased by 59.6% to RMB, 94.2 million from RMB, 232.9 million in the same period of 2019. mainly as a result of the reduced service compensation expenses recognized in the third quarter of 2019, which was partially offset by the increase in professional service fees. The amount of service compensation expenses allocated operating expenses in the third quarter of 2020 was RMB 33.2 million, compared to RMB 228.2 million in the third quarter of 2019, and RMB 33.9 million in the second quarter of 2020. Our operating income net in the third quarter of 2020 was RMB 32.5 million, compared to RMB 11.8 million in the same period of 2019. Adjusted operating income in the third quarter of 2020 which excludes service compensation expenses, increased by 130.7% to RMB, 71.2 million from RMB, 30.8 million in the same period of 2019. Net income in the third quarter of 2020 was RMB 59.6 million, compared to a net loss of RMB 165.4 million in the same period of 2019. Adjusted net income in the third quarter of 2020, which includes service compensation expenses, shelf loss in equity method investments, and impairment loss of investments, improved to RMB, 98.7 million from RMB, 72.2 million in the same period of 2019. Implying an adjusted net margin of 3.9%. For the third quarter of 2020, basic and diluted net income per ADS were RMB 0.27 and RMB 0.26, respectively, while adjusted basic and diluted net income per ADS were RMB 0.39 and RMB 0.39, respectively. As a result of uncertainties surrounding the current merchant action, which we believe could potentially affect our views on both operational conditions as well as the market, we will not provide guidance for the fourth quarter of 2020. As we advance throughout remainder of 2020 and beyond, we remain committed to improving our monetization capabilities and operating efficiencies. At the same time, We also plan to continue upgrading our user experience, diversifying our platform offerings, and building the growth of our international initiatives to capture additional market share in selected overseas markets. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Please note, we ask that you first pose your question in Chinese and then repeat it in English. At this time, we will pause momentarily to assemble our roster. And today's first question comes from Daniel Chen with JP Morgan. Please go ahead.

晚上好,管理层。谢谢回答我的问题。 我有个问题是关于我们这个合并这个协议的。 就想问一下就是能不能多说一说就是这个合并的协议是怎么样达成的。 然后我们怎么去确定这个一股斗鱼的ADS就换这个0.73股护牙ADS的这个比例。 I have a housekeeping question on the merger deal with Huya. So how do Douyuan Huya arrive at the 10 Douyu ADS in exchange for 7.3 ADS of Huya? and what are the major processes in the future for the merger deal, and which we see from the financial release that will happen in the first half of 2021. Thank you. Thank you.

Let me answer the first question, which is about the agreement and the 7.30% exchange rate. This is because Douyu and Huya were established by independent and non-profit directors in the past. The special committee of the two parties, under the assistance of professional teams such as financial advisors and legal advisors, conducted a comprehensive competition survey on the financial, tax, business, and legal issues of various companies, and evaluated the model of financial prediction and valuation. At the same time, each representative company conducted a very in-depth commercial negotiation on the related terms of the merger. The financial advisor of the two parties, I will translate the response to English regarding the question on the record.

both Huya and Zouyu have established their own special committee composed of independent directors, and with the assistance of financial advisors and legal counsels, both special committees conducted due diligence on their respective companies' accounting, tax, business operations, legal, and other relevant matters, and carefully evaluated the financial forecast and valuation. and engaged in the negotiation of merger agreement on behalf of their respective companies. On this basis, both companies' independent financial advisors have provided the special committee with their fairness opinions on the share exchange ratio, and based on their respective special committee's recommendations, both Huya and our board of directors approved the merger agreement.

Regarding the subsequent important processes, This morning, Huya has submitted the F4 document to SEC, which is the package of stocks issued by foreign issuers due to bingo, waiting for SEC's approval. F4, as the registered document of Huya's newly issued stock, contains the Procurement Statement of Douyu, which is the document of Procurement Statement of Douyu, which is the document of Procurement Statement In addition, it also contains other important information about the peace deal. At the same time, this morning, Douyu has already submitted 1313 documents to SEC, which is a freedom-of-trade declaration document, and is also waiting for SEC approval. After SEC approves F4 documents, Douyu will hold a special shareholders' meeting to vote on this peace deal, and it will be approved by more than two-thirds of the shareholders' representatives at the initial meeting. Regarding the key next steps, a few hours ago, Huya has filed a form F4 with the SEC and is currently waiting for review and approval.

which is a form for foreign issuers in relation to M&A transactions. It serves as a registration statement for Hoya's newly issued stocks, which also includes a practice statement for Douyu to solicit a vote from its own shareholders at the upcoming shareholder meeting. So form F4 also contains other crucial information related to the merger. And in the meantime, we have submitted a form 13E3 to the SEC for its approval, which is an application form for delisting and privatization. After getting SEC approval on F4, we will hold an extraordinary general meeting to vote on this merger. And once the number of votes for the merger exceeds two-thirds of those votes presented at the meeting, the merger will be considered approved by our shareholders. And regarding the timetable, we don't have a definitive timetable yet, but, you know, all parties are working towards, you know, finish or close the transaction.

Thank you. Thank you. Our next question today comes from Alex Liu with China Renaissance. Please go ahead.

Thank you, Mr. Guang. I have two questions here. The first question is, after this merger, can we increase the co-efficiency of the company's income and cost? How should it be reflected? And can this help us to improve it? The second question is, I see a detailed problem, that is, I see that our return on cost has increased a little. I'll translate myself. So first question, regarding the proposed merge, could you share with us where are we going to see the synergies on both revenue and cost side going forward? And the second question is that I noticed our bandwidth cost was up slightly sequentially this quarter. What are the main reasons and how should we think about this item in the longer term? Thank you.

This first question is for me to answer. Because this merger is still in a state of crisis, it is difficult for us to analyze the effect of the merger after the merger. In the future, the effect of the merger may include several aspects. One is from the perspective of users and income, based on the current situation, We believe that the advantages of two platforms on the mobile and PC end of the game can get some benefits. In this way, we can further improve the depth and breadth of the overall user environment of the company after the merger, and further improve the traffic and user participation indicators of the company. Secondly, in terms of cost, we believe that this merger will have a significant impact on the cost of live content. And it mainly includes, for example, the optimization of all aspects, such as the cost of hosting the broadcast. Thirdly, we think that in addition to the optimization of content cost, we think that the cost of management, development, operation, and IT infrastructure will have a certain action effect, thereby reducing the cost and the cost of each item in general. In addition, in the case of the merger of the two companies, because this time there will be a merger with Qi'e, we think that there will be more in-depth cooperation with Tencent. I would translate for Mr. Chen.

So due to the fact that the merger has yet to close, we have not reached a conclusion on the potential synergy effects we could achieve from the merger, and neither have we quantified these synergies. But from a higher level, we believe there are a number of areas that we should explore for the synergies. First of all, users and revenues will believe the content of mobile and PC games from respective platforms are complementary to each other, and the merger should result in more comprehensive content coverage to further improve the depth and breadth of the consolidated content ecosystem to further boost user traffic and user engagement. And secondly, from cost perspective, We think the merger will create a better economy of skill on the common cost, for example, streamers signing bonus. And certainly, we think there could be further synergies to be achieved from other operating expenses, such as G&A, R&D, and IT infrastructure expenses. And in the future, we believe that both platforms, plus Penguin, will be able to, you know, leverage their respective leading advantages on gaming content and strengthen our joint cooperation to develop more innovative user interactions, content formats, and monetization methods.

Let me answer the second question, which is the reason why the 3D platform has been completed. On the one hand, the number of users and participation of the platform has been further improved. On the other hand, the third quarter market is actually called the second quarter, which is more dense. At the same time, the platform adopted a more efficient video coding technology, which also helps to reduce the cost of exchange. Therefore, the share is below the increase in the cost of exchange. Next, if we look at the fourth quarter, the cost of exchange will still maintain a small rise trend. Mainly because the fourth quarter's large market is more dense.

Regarding your question on the reason we are seeing a decreasing trend on the bandwidth cost, sorry, an increasing trend on the bandwidth cost on a quarter-over-quarter basis, in the third quarter, bandwidth cost increased slightly due to the fact that we have seen increased user traffic and higher user engagement, as well as more intensive tournaments during the period. But this increase was partially offset by our video coding technology which helped us to achieve more efficient bandwidth usage in the quarter. And we affect the bandwidth cost in the fourth quarter of 2020 to increase slightly on a sequential basis due to more esports tournaments during that period. Thank you.

Thank you. Our next question today comes from Lei Zhang with Bank of America Securities. Please go ahead.

Hi. Thank you for accepting my question. I have a few questions. The first one is about the competitive environment. Have there been any changes since 3Q? Have you seen any changes in the competitive structure? How do you see the game streaming industry after the merger? Oh. My first question is about the competitive landscape. Could you share with us your update view on the competitive dynamic in recent quarters and do you see any change in game streaming industry after our merger with Huya? Second delay, we noticed that some of our ShopWeDo peers are also doing like ShopWeDo and e-commerce streaming. So can you share with us some updates on your game video and e-commerce live streaming business? And another housekeeping question on OPEC, what are the main reasons of the increase of OPEC in the third quarter, and how should we look at the OPEC 10 in the next one or two quarters? Thank you.

The first question is answered by me. In the past three weeks, we have seen that the business situation in the industry has not changed significantly. As a live broadcast industry, we always use games as the core content. In this field, we have deepened the content platform for the games that surround them, and expanded the field of exploration such as game mid- and short-series. Then we also saw that after the short-series platform entered the game streaming field, these platforms also attracted more new traffic for the game streaming field, and inspired more user-oriented groups to pay attention to the e-sports field, which also promoted the development of the game streaming industry. We think this is a good thing for the development of the entire industry, and we welcome it. From a competitive point of view, we believe that the core competition in this industry is mainly focused on economic operation, advantageous content, and commercial transformation. And the long competition between the platforms is mainly in the generation of content products and the diversification of them. We will also establish a new game content community with our major shareholder, Tencent, and then do more integration of the entire industry resources. And then we believe that The gaming live platform should be defined as the core content of the game. Our advantage lies in the accumulation and creative ability of gaming content. It is more suitable for the gaming user community. There is also a mature and professional gaming content ecosystem. Currently, we have established a relatively high content balance, which makes it difficult for us to be surpassed by the user community in the core gaming user industry. Okay, I'll translate for the response to the first question. Regarding the competitive landscape,

we have not seen significant change since last quarter we speak. As a leading game live stream platform, we continue to build our game-centric content ecosystem and energize our esports community and explore other user segments, such as developing short-form gaming videos. Since short-form video platforms enter the game live streaming space, Overall, we've seen both user traffic and customer diversification to increase accordingly, which has also helped to raise the ceiling of the entire game live streaming market and further accelerated the development of the industry. And from the competition perspective, we believe in the short run, the industry competition will mainly revolve around the refinement of marketing efforts, the diversification of high quality content and the innovation of monetization venues. In the long run, we expect the competition to focus on more rapid product upgrades and innovation of content forms, such as video and entertainment content, and the establishment of social communities together with test and help, such as e-sports community. and the further integration of the resources both up and down the industry value chain. And we have been focusing on building a game-centric content platform since inception. And we have clear advantages in terms of professional content creation and content accumulation, vertical game user-based formation, and the build-up of talent agencies, as well as cultivation of the professional esports content ecosystem. Now we have created a stronger content barrier, and as a result, we have clear leading advantage in attracting and maintaining those core game users. So looking forward, we believe with the race receiving of the entire industry, we will take more advantage of the above-mentioned content and the value chain strength to further expand our user coverage and build traffic. And lastly, after the merge merger, In fact, more in-depth commercial cooperation between the two platforms, as well as with Tencent, which we believe will further enhance the positioning of the combined entity.

Let me continue to introduce the development of gaming streaming video and e-commerce business. First of all, about gaming streaming video, including short videos, we all think it is a the content is more suitable for the user to review the content, and it is more suitable for the user to share and forward the content on the social platform, thereby helping the platform to acquire more users and further increase traffic. In the third quarter, our game recording video has basically completed the design and development of the IPv4. Our approach is to combine the function of video streaming with the live broadcast business to fully play the advantage of the platform and provide a more diversified content supply for the platform. to expand the user's use scenario and the user's use frequency. In addition, regarding the e-commerce live broadcast business, we are currently positioning it as a supplement to live broadcast content, e-commerce live broadcast as a supplement to the entire live broadcast content. Because the mobile platform is mainly for young male users, so games and sports-related products are more suitable for e-commerce live broadcast on the mobile platform. In the short term, we mainly want to improve the diversity of content and the diversity of income of the host through e-commerce live broadcast.

Regarding the second question on the short videos and e-commerce business, so we believe that the pre-recorded screen videos, including short videos, as a content carrier is more suitable for playback. It's also more inconvenient for the users to share and forward on the social platform, which in turn will help us to obtain more users and increase the user traffic. As of the third quarter, we have essentially completed the design and development of our application for pre-recorded game videos. Through this application, we are able to provide our users with an organic combination of rotating the pre-recorded game broadcast and the live streaming content, offering a more diverse supply of content to our platform expanding the coverage of various user scenarios and ultimately stimulating our user engagement. And speaking of our e-commerce business, we position it as a supplement component to our live streaming business. And considering the unique user profile on our platform, which mainly consists of young male users, we believe that games and both related products are more suitable for our e-commerce live streaming. And in the short run, our main goal will be to utilize our e-commerce live streaming business model to further diversify our content and increase the streamer's income.

Thank you. Our next question today.

Before we pick up next one.

Let me introduce some changes in operating fees. First, let's look at sales fees. Sales fee composition mainly includes salespeople's salary, need to promote, online and offline activities, and sponsorship of e-sports teams. The reason why the sales fee of Q3 is deducted from the stock market is that in the third quarter, the event activities are more intensive than in the second quarter. So we increased some publicity investments for the event. In addition, we also increase the investment of some highly influential e-sports teams. We have long been optimistic about the development of e-sports industry. We will continue to increase investment in e-sports-related activities and team sponsorships. At the same time, as we upgrade our products and increase the efficiency of oil conversion, we also plan to strengthen the supply and marketing. Therefore, in the future, the cost of sales will definitely remain the same. People will maintain a steady growth, but the cost of sales and revenue will continue to deteriorate. As for management costs, The increase in the exchange rate is mainly due to the cost of the joint venture and related professional service fees. In the future, the management cost will be controlled by the steady growth of this small group. As the platform is more and more competitive, the management cost and the amount of income will gradually decrease. If the development cost is reduced, there will also be an increase in the exchange rate. This is mainly because, on the first hand, we are investing in the development of new products and new metals in China. In addition to guaranteeing the industry leadership of new technologies and new products, the second is that we have increased the recruitment of some overseas R&D personnel. More than 80% of the R&D cost is the salary of R&D personnel. We will continue to invest in R&D personnel to ensure the leadership of the industry, but the overall gain will be more stable, accompanied by the rapid growth of revenue, the future R&D cost and the volume of revenue will also be further improved.

Regarding the change on the operating expenses, first of all, sales and marketing expense, including SBC, mainly includes the staff, salaries, and other related expense, channel promotion costs, sponsorship fees for our e-sport team, as well as expenses for the online and offline events. In the third quarter this year, the sales and marketing expense, including SBC, increased on a sequential basis mainly due to our increased marketing efforts for the esports tournament resulting from the increase in the esports tournament frequency as compared to the prior quarter. It was also due to our increased investment into those esports teams with no full market interest. We are quite positive about the long-term development of the esports industry and we will continue to invest in esports related events and e-sports team sponsorship going forward. Meanwhile, we will also consistently upgrade our product features to improve our user conversion, and we will also enhance our channel promotion. In the future, we expect the absolute value of our sales and marketing fans to increase, well, as a percentage of total revenue to continue to improve. Speaking of Gen A, For the third quarter of 2020, G&A excluding SBC increased on a sequential basis, mainly due to higher professional service fees resulting from the merger. And going forward, we believe the G&A expense will grow at a slow and steady rate with higher operating leverage. We expect the G&A expense as a percentage of the revenues to further decrease. And lastly, on the R&D cost, In the third quarter, R&D, including SBC, increased quarter-over-quarter, mainly because the increase in expenditures for the research and the development of new products to maintain the leading position of our technology and products in the industry, as well as the increased headcount for the overseas R&D personnel. The stock salaries accounted for more than 80% of our total R&D expense. So going forward, although we will continue to invest in our R&D development personnel to maintain our industry leadership, we think our overall R&D expense will grow steadily. And with the rapid revenue growth, we expect our R&D cost as a percentage of the revenue to further increase. Thank you. Next one, please.

Thank you. Our next question comes from Billy Leong with Hightail International. Please go ahead.

Hello, Director. Thank you for accepting my question. I have two questions. The first question is about the end of the 2020 LOL tournament. I heard that this is more popular. So I want to ask, from our platform, from this data, does SI bring more traffic to our platform? Thank you management for taking my questions. I have two questions. The first question is related to the recent LOL Grand Finals competition. So from our perspective, has these eSport events been bringing a lot of traffic and users to our platforms? And the second question is related to our cloud gaming. Can management share some color in terms of how our cloud gaming has been developing? Thank you.

It's like this. At the end of the year, the biggest eSports League Qualifier is going to be held. It's going to attract a lot of people. Especially this year, due to the impact of the epidemic in the first half of the year, and then the offline events of major countries have been delayed or cancelled, which has made S10 the most global online event this year. The other one is that S10 was held in Shanghai, which has attracted a lot of attention in China, and has become the focus of online attention. The EU League has always been fighting for the advantageous zone, and has a large number of people's major countries and

Regarding S10, we all know that the League of Legends World Championship as the grandest official event for LOL has always been attracting a great number of users, especially this year, given many last year offline events have been delayed or canceled due to COVID-19. making S10 one of the really remaining global esports events of the year. Besides being held in Shanghai, also helped it to attract a large audience domestically and attention over the internet. The LOL has always been a premium content segment for Douyu. We have many well-known streamers and a multiple layer streamer and content supply system. We also signed many famous LL esports teams at home and abroad, including LGD, JDG, TS, and the champion team, DWG. And these adventures helped the LL segment to reach historical highs in many operating metrics during the championship, making Douyu the first choice for audience and attract high-quality user traffic on our platform.

Regarding the progress of cloud gaming, the development of the entire cloud gaming industry chain and related infrastructure are currently in the initial stages. As a pioneer in the field of cloud gaming, Douyu has been exploring the cloud gaming platform. In this period, the 2.0 test version of our cloud gaming platform has also been launched. This version mainly uses a new UI interface design that supports more than 200 games, and the server optimization and compatibility are being optimized. Regarding the cloud gaming, we believe that

Cloud gaming industry chain and related infrastructure construction is still underway and as the pioneer in the industry, we continue to explore in cloud gaming decoder. For example, we launched the beta version 2.0 of cloud game decoder. The updated version has a brand new UI design and supports over 200 games to date. We also optimized the server functionality and compatibility reduce the queuing time and delay, which helped to further upgrade our users' overall gaming experience. In addition, we also explored the application for the Cloud Game Plus live streaming user scenario with game developers and publishers. In the future, we aim to add creating new business models by helping users experience games directly or compete with other players from different live streaming room. Thank you.

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

Please go ahead. Thanks management for taking my questions. My questions is about our content strategy in the next couple of years, as well as the growth driver in free revenue, as well as what are the key factors in driving the revenue growth in future. Thank you.

In addition to the advantageous game content, we have also been paying close attention to the appearance of new games, and to discover the vertical game taste that suits the user's viewing needs. We continue to create the surrounding content of the official competition and related self-made competitions and programs. For example, in Q3 this year, we observed that various data on our platform for many new games were better. We also continue to recruit anchors from various new game branches to ensure the supply of high-quality content, which attracts more users to the platform. On the content strategy, first of all, we position ourselves as a game-centric content platform, and the live streaming is just one way to display our content.

So in the future, we believe it's still our first priority to meet user needs, and we will keep raising user traffic through content enrichment. And secondly, games will continue to be our key content segment. Apart from our advantages in the existing game content, we also pay close attention to the new blockbuster games, explore other vertical games, suitable for live streaming and create esports related content, events and programs. For example, in the third quarter, we noticed a number of new game titles delivered strong user trends on our platform. Meanwhile, we continue to recruit new streamers for different game titles to maintain a steady supply of high quality content and attract more users to our platform. And at the same time, we will continue to enrich our main game content in areas like food, live talent show, outdoor, and ACG, which will help us to better meet our users' diversified needs. 关于这个3C多的收入增长的话,我们先看看这个直播收入。 那个3C多的话,其实直播的日常的收入的话保持稳定增长。

Although we did not achieve our expectations in the last quarter, through the continuous optimization and optimization of the interactive product function, we were able to acquire new paid users while the old users were getting used to it. This led to a growth of paid users in the same range in the third quarter. The number of paid users rose from 7.6 million in the second quarter to 7.9 million in the third quarter, with a growth of 4.5% in the range. Secondly, we used the industry-based transportation of the sub-districts to make all sub-districts The efficiency has been steadily improved. In addition, the platform has strengthened the diversified construction of live broadcast content and has also improved the efficiency and income contribution of non-agriculture areas. The third point is that through close cooperation with the union and the use of products specifically aimed at improving the income of mid- and upper-middle-class broadcasters, the efficiency of mid- and upper-middle-class broadcasters has been continuously improved. As for advertising revenue, the growth of 3G advertising revenue is mainly due to On the revenue growth trend, in the third quarter, our revenues from the routine fans events continue to grow steadily.

Although the event at the end of the quarter did not meet our internal expectations, we continued to optimize and improve our interactive product function while cultivating the paying habits of existing users and actively acquiring new paying users. And as a result, our live streaming revenues in the third quarter continued to grow on both the over-year and quarter-over-quarter basis. Meanwhile, our paying users increased by 4.5% quarter-over-quarter to 7.9 million from 7.6 million in the previous quarter. And secondly, our refinement of operations across different segments helped to improve each segment's monetization efficiency. We also continued to diversify our content to improve the monetization efficiency and revenue contribution from our non-gaming segment. And we also further improved the monetization efficiency of our mid-tier streamers through a deeper collaboration with talent agencies as well as tailored monetization products. And on the advertising revenues, the quarter-over-quarter increase was mainly attributable to an increase in streamers' promotion ads. At the same time, the launch of new game titles such as Yuan Shen and Wang Fu Juexi helped us further increase the game advertising revenue. And we expect the brand advertising revenue to increase in the fourth quarter as a result of increasing branding activities during that period, including those that will take place during the 2011 shopping festival. Thank you.

This concludes the question and answer session. I'd like to turn the conference back over to the management team for any final remarks.

Thank you all for joining us today. If you have any further questions, please feel free to contact us through our ILS site. Thank you and have a good day.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.