DouYu International Holdings Limited

And good evening, ladies and gentlemen. Thank you and welcome to DOW U International Holdings Limited's first 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. 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 DOW U. Please go ahead, ma'am.

Thank you. Hello, everyone. Welcome to our first quarter 2021 earnings call. Joining us today are Mr. Shao Diecheng, 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.soe.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 four looking statements made pursuant to the safe harbor provision for the Private Securities Litigation Reform Act of 1995. These four looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the company's control, which may cause actual results, performance, or achievements of the company to be materially different from the results, performance, or expectations implied by the forward-looking statement. All forward-looking statements are expressly qualified in their entirety by the cautionary statement with 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. I will now speak on behalf of our Chairman and CEO, Mr. Shao-Zi Chen. In the first quarter of 2021, we upgraded our operational system and steadily improved our operational performance, with our average MAUs reaching 191.9 million and average mobile MAUs reaching 59.1 million. Meanwhile, our quarterly paying user count was 7 million, and total revenues were on the 2.15 billion. In this quarter, without the influence of COVID-19, users' tipping habits have normalized, which caused our overall revenue growth to be relatively subdued in the period. Nevertheless, the breadth and depth of our game-centric live streaming platform continues to perform well attracting more users and fueling our platform expansion. During the quarter, our total average MAUs increased by 21.3% year-over-year to 191.9 million, while our average mobile MAUs increased by 4.5% year-over-year to 59.1 million. Such MAU growth was mainly driven by five factors. First, our broadcast of large-scale esports tournaments such as LPL Spring 2021, KPL Spring 2021, and Crossfire Pro League Spring 2021 continued to drive our user-based expansion. Secondly, we explored deeper partnerships with game developers and refined our operations through jointly produced events for different game titles, such as Peacekeeper, Honor of Kings, and League of Legends. Third, we explored more organic synergies between game and entertainment segments. For example, during Chinese New Year, we facilitated streamer collaboration with both movie crew and celebrities to produce premium live streaming content in our Peacekeeper and PUBG segments. Fourth, we ramped up our efforts to provide a broader content mix through our video and communities business and thus provided users with better viewing experience through diverse content. In addition, as the pandemic subsided and China successfully brought the virus under control, the reopening of in-person internet cafes led to a year-over-year uptick in our PCM use. Now, turning to our content updates, during the quarter we continued to expand our influence up and down the esports industry value chain. Moreover, to fuel the growth engine of our content ecosystem, we further refined our game-centric live streaming business while diversifying our video and community content initiative. In order to develop more quality esports content, we utilized the large-scale esports tournament broadcast, self-organized events and programs and sponsored and invested more in top esports teams. We achieved superior results during the quarter by broadcasting over 50 large-scale esports tournaments and self-producing over 40 high-quality esports tournaments. We also implemented several innovative features for large-scale tournament broadcasts to better satisfy users' wide range of content viewing demands, differentiate our platform offerings and boost user engagement. During KPL Spring 2021, for example, we provided users with a diverse set of viewing options around video, community, and live streaming. Such options included watching games with celebrity groups, tournament highlight reporting, specialized programs designed for key game streamers, as well as video and text posts on game progress. Additionally, during the LPL Spring 2021 broadcast, we supplied users with exclusive game commentary and a supplemental live streaming room through which our exclusive top tier streamers delivered high level analysis and commentary to provide better user experience and enrich their content broadcast viewing options. And finally, we also added more interactive events to our Crossfire Pro League Spring 2021 broadcast, which helped to better circulate traffic between tournaments and pregame shows, create better viewing experience for our users, and stimulate user engagement. Beyond such platform innovation, we also worked to develop more in-house tournament IPs Consider our self-produced Douyu DNF all-star tournament, for example. Through this event, we maintained high level of user engagement during the quiet period after the official tournament ends, supplied DNF segment streamers with a large repository of tournaments, and provide users with more premium and differentiated content. As we continue to accumulate more quality video content we have also established a pyramid structure consisting of three contents here. Our top-tier video content features PGC content produced through our partner collaborations and by top-tier streamers periodically, while our mid-tier content features those produced by mid-tier streamers and platform-signed video content creators. At the bottom is video content produced by long-tail streamers and video content creators, as well as other high-quality UGC content. Meanwhile, by leveraging the monetization and engagement advantage of live streaming, we encourage video content creators to live stream on our platform, which helps them improve their overall income and increase the user engagement. we also recognize video's advantage in content accumulation, distribution, as well as extension, and encourage our streamers to build up their video content profiles on our platform. For our community's business, the two main functions are exploring games and facilitating more interaction between players, game developers, streamers, and video content creators. with our particular emphasis on game developer collaboration and increasing our influence among gamers. In fact, during the quarter, we organized several events, such as to bring gamers, streamers, video content creators, game media outlets, and game developers together, foster the community engagement, and better facilitate interaction. Now turning to monetization. In the first quarter, our quarterly paying users were 7 million, with our paying ratio reaching 3.6%. Meanwhile, our ARPPU increased steadily on a year-over-year basis to RMB 285. Although we saw the revision of users' tipping behaviors to that of pre-pandemic levels, as the pandemic was gradually brought under control in China, we continue to execute a proactive operating strategy centered on increasing user interaction to further stimulate users' paying habits and grow ARPPU. Going forward, we will work to further optimize our product matrix, diversify our paying scenarios, and enhance our users' overall paying experience. Through such measures, we should be able to better attract and retain a base of high-quality paying users and achieve a healthy ARQPU growth rate. Finally, we remain committed to refining our content operations across different segments, which should help to further boost our segment monetization efficiency. We are also making good progress on the R&D front. During the quarter, we released a new feature that allows streamers to live stream directly through their internet browsers. By eliminating the process of downloading applications in advance, such as OBS and the Douyu live streaming tool, we have further reduced the threshold for new streamers to start live streaming on our platform. For cloud games, we tested cloud-based live streaming tool which made it easier for regular game users to simultaneously play and livestream games in Blu-ray video quality on our platform, thereby lowering the hardware barrier traditionally in place for the streamer. We have also continued to fortify our foothold overseas. During the quarter, we continued to explore and increase our investments in the overseas market. As a result, Our Japanese game live streaming product, Milden, currently maintains its leading position in Japan. In summary, during the quarter, we maintained a rigorous operating strategy and continued to develop an integrated content operation system around our three core business, live streaming, video, and community. Such efforts have helped us to better position our platform for more sustainable growth over the long term. By successfully implementing these strategies, we have provided our core user group with significant benefits and thus paved the way for their steady growth. Looking ahead, we remain committed to refining our video and community business models to create an integrated content ecosystem with our game-centric live streaming business as its foundation. We also plan to further execute several initiatives in product, streamer, and content to consciously improve our overall monetization capabilities in the long run. 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 first quarter.

Thank you, Momo. Hello, everyone. Total net revenues in the first quarter of 2021 were RMB 2.15 billion. Live streaming revenues were RMB 2 billion, compared with RMB 2.11 billion in the same period of 2020. Advertising and other revenues were RMB 154.1 million, compared with RMB 165 million in the same period of 2020. The year-over-year decrease in live streaming revenues was mainly due to the reversion of a user's tipping behavior to that of the pre-pandemic level, 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 platform in the period. The year-over-year decline in advertising and other revenues was mainly due to the trend of getting 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. Cost of revenues in the first quarter of 2021 increased by 5.6% to RMB 1.89 billion from RMB 1.79 billion in the same period of 2020. More specifically, revenue share fees and the content cost increased by 5.4% year-over-year to RMB $1.66 billion. This was because of the company's increased investments in the broadcasting rights for esports tournaments, in-house production of proprietary content, and quality streamers in the overseas market. Fenway's cost in the first quarter of 2021 increased by 12.6% to RMB 172.1 million, from RMB 152.9 million in the same period of 2020. This was mainly due to the promotion of more high-quality viewing options and was partially offset by our ongoing development of P2P and CDN technologies, which have helped to improve our bandwidth efficiency. Gross profit in the first quarter of 2021 was RMB 260.2 million, compared with RMB 485.9 million in the same period of 2020. Gross margin in the first quarter of 2021 decreased to 12.1% from 21.3% in the same period of 2020. This was mainly due to the decrease in our total net revenues. which resulted in an increased proportion of revenue share fees and current cost to total net revenues in the period. Sales and marketing expenses in the first quarter of 2021 increased by 95.5% to RMB 209.9 million. This was mainly due to our increased sponsorships and promotions of eSports tournaments as compared to the same period of 2020 during the COVID-19 pandemic, as well as our increased promotional activities for user acquisition. Research and development expenses in the first quarter of 2021 increased by 19.8% to RMB $111.3 million from RMB 92.9 million in the same period of 2020. This increase was primarily due to additional investments in technical personnel, particularly in the overseas market. General and administrative expenses in the first quarter of 2021 increased by 4.1% to RMB, 88.1 million from RMB 84.6 million in the same period of 2020. Adjusted operating loss in the first quarter of 2021, which excludes share-based compensation expenses, was RMB 91.8 million, compared with an adjusted operating income of RMB 259.5 million in the same period of 2020. Net loss in the first quarter of 2021 was RMB 101.8 million, compared with net income of RMB 254.5 million in the same period of 2020. Adjusting net loss in the first quarter of 2021, which excludes share-based compensation expenses, share loss in equity method investments, and impairment loss of investments, was RMB 70.7 million, compared with an adjusted net income of RMB 296.9 million in the same period of 2020. For the first quarter of 2021, basic undiluted net loss per ADS were RMB 0.19 and RMB 0.19, respectively, while adjusted basic undiluted net loss per ADS or RMB 0.10 and RMB 0.10 respectively. Going forward, we plan to continue exploring new methods of upgrading our monetization capacity and efficiency. Additionally, as we continue to grow, we will focus on further utilizing our operating leverage and fueling the sustainable development of our platform. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw from the question queue, please press star then 2. please ask your question first in Chinese and then repeat the question in English the first question is from Daniel Chen of JP Morgan please go ahead uh

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

Thank you for answering. The year-over-year increasing MAO in the first quarter, was mainly due to broadcasting major tournaments and self-produced tournament content. It was also caused by the 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. as compared to their rapid growth in the same period last year during the pandemic. In the long term, we expect our PCMAO to remain stable. Most user growth will be driven by the mobile side. In fact, we believe there is plenty of opportunities in the mobile market. As moderate and light game user growth are still under-penetrated. In the future, we will continue to improve our content development systems for live streaming, video, and community business to pursue the steady growth of our mobile MAUs. And for the second question, user behavior is consistent with the trends we have seen over the past few quarters. and our platform continues to be highly seeking for users. To date, the average next month's active user retention rate remains about 75%, which is stable in comparison with the previous quarter. Our user behavior data shows that as the number of years users spend on our platform increase, average monthly time spent on our platform also increased. This shows the curve remains consistent for users who join us at different times, as they gradually become our high-quality and loyal fans over time. As our video and community business demonstrates, our users' data shows that the amount of time spent by each user on our recording and video segments also increased quarter over quarter. This demonstrates the effectiveness of our video business in retaining users and converting them into our loyal users. Thank you.

Thank you.

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

Hi, Manager Chen. Good evening. Thank you for accepting my question. I have two questions. First, I would like to see if there are any new developments in the merger with Huya. Especially, the monopoly review of the industry has been quite serious recently. I don't know if this will have a negative impact on our transactions. Secondly, I would like to ask about our overall strategic growth, and mainly about the two new businesses, video and community. Are there any new aspects that you can share with us? Especially for the video business, we also know that there are quite a lot of players in video. How do we do it from a strategic point of view to compete with them in some differences? Thank you for taking my question. Two questions here. First, any updates on the merger deal with Huya and do we see some impact from the tightening antitrust regulation? Secondly, can you give us more color on the WeDo and the community new initiatives we launched the last year? And for the WeDo business, how should we compete with other WeDo players? Thank you.

Let me answer the question you asked. The peace trade between Douyu and Huya is still in progress. However, the time difference is mainly due to the review process of the relevant domestic regulators. It has a fixed process. In the past few years, with the rapid development of China's Internet, the relevant policy and regulations are gradually improving. Regarding anti-corruption supervision, we think that the current state wants to promote the whole Internet to develop in a healthier way. Various platforms also need fairer and more positive competition. This is very valuable for Douyu's long-term development. Looking at Fan Entertainment's current version, we think that the current stage of industry competition is quite intense, whether in terms of scale or performance. We think that companies like Douyu still have a lot of room for improvement. So, the main purpose of the joint trading of the two companies

Regarding your first question on the merger progress, currently the potential merger between us and VIA is still on track, and we believe that the exact timing for this deal to be closed depends on the approval process by the relevant Chinese regulators. And with the rapid development of the domestic internet industry over the past few years, we have seen that authorities have gradually improved industry policies and regulations, and we believe that the antitrust regulations are in line with the government's goal of promoting positive and fair competition environment among these internet companies, encouraging a level playing field across the industry, which will also help to support or long-term development. And for the entire entertainment segment, we also believe that the industry competition is still relatively fierce at this stage, and we have the potential to further improve both our user skill as well as revenue size. So the goal of our merger is to further integrate the high-quality resources on both sides to improve our operational efficiency and increase the overall value of the combined platform and ultimately unlock the greater growth potential in the future. 关于刚才提到的第二个问题的话,我们在于视频和社区,

In the last four seasons, Douyu has been focusing on video and community. The two businesses have become rich in content. In the video business, the platform has established a pyramid-shaped segmentation content system. In the top-level content storage, the platform has achieved a good viewing effect through its self-sufficient video program. In the content storage of the central and central departments, the platform has held Douyu Thank you. and other popular e-games are the core players. A large number of professional competitions and media have also contributed to this. In the event, a large number of event information and players' content were produced. The overall content structure of the platform has played an important role. In addition, video and live broadcasts have been linked to each other for quality content. At the same time, the game announcement community platform is also a very good channel. As a high-intensity gaming platform, Regarding 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. On the top is our top tier video content, which contributed to a significant amount of viewership, which included video programs that we self-produced and tailored for streamers. And in the mid-tier level, we hosted large-scale self-organized events, such as the W Video Contest Spring Season, to maintain a steady supply of high quality content and doubled the number of daily active video content creators on our platform on a differential basis. To date, we have accomplished our new term goal of establishing a stable supply of content for all mainstream video categories on our platform. And going forward, combined with the continuous content enrichment and more targeted promotional activity for users, we expect our video-based viewership to further improve. Regarding the community business, we launched a function such as Find Games to promote more activities among users. Our users spontaneously developed their own player circles for different popular games such as LOL and On of Kings for game discussion and social purpose. And in addition, a majority of professional tournament media outlets joined our community as well and produced a large amount of exciting reports during the tournament period, which further diversified our content and contributed to an engaging community environment. And as a large community with the greatest density of game players, our community naturally grows into an effective marketing and promotion channel for the game developers. So for this quarter, we helped with the presentation and introduction for over 30 kinds of different console games and mobile games, and successfully converted a significant amount of users into game players.

About the third question, you mentioned the difference in competition with other video platforms. As a game-oriented comprehensive content platform, Then we are mainly investing in live content and high-quality anchor resources. There are corresponding advantages and disadvantages on both sides. On the one hand, we will gradually combine the content of live broadcast and video to assist the platform in the transformation of live broadcast business and the benefit of user interaction. By leading more soldiers and creators to broadcast on the platform to increase the overall income level of these creators, and through chats and other functions, to enhance the interaction between creators and fans. At the same time, the platform also uses our video content to accumulate the advantage of continuity, to encourage the streamer to produce more high-quality video content, and thus further enhance the influence of the streamer. On the other hand, the platform has also gradually formed a link between video business and community functions, through the introduction of a large number of game manufacturers and professional competitive media in the community, to form a close cooperation relationship. At the same time, we have cooperated with a large number of game official accounts, and produced a batch of high-quality exclusive PCs. And on the last question, on the differentiation on the video business,

As a leading game-centric integrated content platform in China, we have already established a relatively high barrier for both the top tier live streaming content as well as the quality streamer resources. During the quarter, we gradually explored the organic synergies between the live streaming and video content. We leveraged our strengths from the live streaming business in user engagement and monetization, encouraged more video content creators to live stream on our platform, and helped them increase their overall income. And by utilizing features like Google Chat, we also improved the user engagement. And at the same time, we recognized that videos advantage in content distribution accumulation as well as extension. And we encourage our streamers to improve their platform influence by building up the video content profiles on our platform. And furthermore, we have also gradually built a connection between our video and community business In our community, we attracted and established a close partnership with a large number of game developers and professional tournament media outlets. We also collaborate with a large number of official game accounts to produce exclusive high-quality PGCs for improving our influence in the game industry. While users watch the high-quality PGC game content, we provide them with the opportunities to directly interact with those game developers and tournament media outlets. So this helps to improve the user engagement and participation. Next question, please.

The next question is from Thank you for accepting my question.

I mainly have three questions. The first is, we saw that Huya bought this LPL's five-year exclusive live broadcast rights agreement. I would like to ask if this will have any adverse effects on our platform's live broadcast content. Thanks management for taking my questions. I have three questions. First, we noticed that we have signed five-year exclusive media rights with LPL. So what's the impact to DOE? Are you going to incur additional content cost? Second question is, what is the sequential growth of the broadcasting rights cost? And how should we think about DOE's future investment in the cost, considering this year's competition right now? And lastly, could you please elaborate more about the reason on the sequential decline of live streaming revenue? Thanks.

Thank you for your question. For the League of Legends Pro League, we expect to broadcast this tournament as well. So, in terms of broadcasting official tournaments, our content will not experience any negative impact. As one of our most popular game segments, League of Legends has a large pool of famous streamers, loyal game players, as well as different tiers of streamers and content types. So, we believe that we will be the go-to platform that users choose first to watch the tournament. Moreover, we plan to develop a multi-angle tournament viewing experience for users. We will accomplish this by generating game content through our video community. and live streaming segments and provide users with more fun to watch tournaments on Douyu with different content options. We believe our League of Legends segment will maintain content creativity and industry leadership while continue to generate greater user traffic.

Regarding your question on the expenditures, In the first quarter of 2021, our broadcasting rights costs decreased on a sequential basis. This was due to the fact that we amortized most of our broadcasting rights costs for the League of Legends World Championships in the first quarter of 2020. In the first quarter of 2021, our broadcasting rights costs returned to their regular levels. As a leading game live streaming platform in China, we are committed to enriching our content categories and improving our content quality. So 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. As to the live streaming revenues, the first quarter, which includes the Spring Festival holiday, is traditionally the off-season. During the period, streamers usually chose to spend more time with their families, and the overall live streaming volume is generally at its lowest in a given 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 PAN users' interactions and purchase willingness, which helped to create a sequential increase in our ARPPU. Going forward, we will continue to improve each segment's monetization efficiency by refining our operations. Furthermore, We will deepen our collaborations with talent agencies and customize monetization products to increase the income and monetization efficiency of our mid-tier streamers. Thank you.

The next question is from Ricky Sun of HSBC. Please go ahead.

I have two questions. I want to ask about the ratio of income. I want to ask what will happen after the growth. And what is the main driving factor? And the second question is, I want to ask about the cost of sales and management. What is the main reason for the change in this quarter? And then I will translate it myself. Thank you for taking my questions. Two questions. First is for the revenue sharing ratio. Can management comment on the drivers behind it and what will be the trend going forward? And second of all is sales and marketing and G&A expense. Can management comment on the change in 1Q and what will be the trend going forward? Thank you.

We will maintain our 50 to 50 revenue split sharing policy 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 to 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 streamers' 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, eSports team sponsorship fees, and expenses for offline and online activities. In the first quarter of 2021, sales and marketing expenses increased on a sequential basis. This increase was due to our increased investments in user promotional activities, which was 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 will upgrade our product features to improve the efficiency of traffic conversion. We also intend to enhance our channel promotions, therefore, In the future, we expect our sales and marketing expenses will increase steadily. For the first quarter of 2021, G&A expenses decreased on a sequential basis, mainly due to the fact that most of our merger-related professional service fees were booked in the first quarter of 2020. Therefore, these expenses had already returned to their regular levels by the first quarter. Going forward, we expect G&A expenses to grow at a slow and steady rate. Thank you.

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

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 Streams. We have launched interactive events, imagined timelines, and customized videos. We have also introduced unique live streaming rooms through VEG. streamers and commentators can livestream during tournaments. Our broader portfolio of content initiatives has helped to increase users' viewing options and engagement, leading to year-over-year increases in our overall UV and number of acquired users. We already have a relatively complete and mature broadcasting system for official tournaments. We also continue to innovate in content through surrounding programs. As a result, we believe that we can bring more high-quality new users to our platform going forward. We noticed that our users have shown more loyalty to high-quality live streaming content on a relative basis. With our competitive live streaming content resources and our pool of top and mid-tier streamers, we maintain a strong content barrier relative to others in the industry. Therefore, despite the fact that nowadays some large-scale esports tournaments chose to broadcast on multiple platforms. We haven't seen any traffic diversion occur on our platform. Thank you.

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

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

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