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.