DouYu International Holdings Limited

Thank you and welcome to DOWU International Holdings Limited's first quarter 2022 earnings conference call. At this time, all participants are in the listen-only mode. We will be hosting the question and answer session after management's prepared remarks. Please note today's event is being recorded. I would now like to turn the call over to the first speaker today, Ms. Lingling Kong, IR Director at DOWU. Please go ahead, ma'am.

Thank you. Hello, everyone. Welcome to our fourth quarter 2022 earnings call. Joining us today are Mr. Xiaojie Chen, Chairman and Chief Executive Officer, Mr. Mingming Su, Chief Strategy Officer, and Mr. Hao Cao, Vice President of Finance. You can refer to our fourth quarter 2022 financial results on our IR website at ir.doe.com. You can also check a replay of this call when it became available in our field hours on our IR website. Before we start, please note that this call may contain forward-looking statements made pursuant to the public provision for the Private Security and Education Reform Act of 1995. These forward-looking statements are based on management, 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 this forward-looking statement. All forward-looking statements are expressed and qualified in their entirety by the cautionary statement, risk factors, and details of the company's filings with 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. Xiaojie Chen. During the first quarter, we continued the study development of our OOB business while adjusting our business operations and executing on our selective copyright procurement strategy. Mobile admin use for the quarter was 55.1 million. Total net revenues were RMB 1.8 billion, and quarterly average paying user count reached 6.4 million. Work margins increased to 13.6%, demonstrating the effectiveness of our selective copyright procurement strategy. In addition, our successful implementation of a series of cost control measures has increased our operating efficiency, driving our adjusted net loss down to RMB 52.5 million. During the quarter, our average MAU decreased by 6.8% year-over-year to 55.1 million, a change that within our expectations. We believe that there are two factors at work. First, as we strive to improve operating efficiency by executing on our selective copyright procurement strategy, we have ceased acquiring overpriced copyrights for esports tournaments, which has negatively affected our MAU. However, the level of the decrease was, in fact, better than our expectation. and MAU has stabilized and stayed within a narrow band. Additionally, our data analysis shows that high-quality content from streamers and self-produced tournaments in different game segments successfully attracted new users regardless of the absence of content from selected esports tournaments. Second, the new games that were launched on our platform in 2021 enabled us to continuously increase our MAU, partially offsetting the impact of terminating content rights for selected esports tournaments. Despite the slow pace of the launch of new games last year, we were able to attract and retain new users by offering them high-quality gaming content, deepening our collaboration with game developers, and refining our customized operations for each game. Turning to our content updates. In the fourth quarter, we maintained our effective execution, our strategy of building a game-centric, comprehensive content platform. We further refined our content offerings, integrating live streaming, videos, graphics, and interactive communities for both esports and non-esports categories. while enhancing collaboration and investment in self-produced content. Furthermore, we extended our collaboration with game developers and distributors to secure our advantage in high-quality content and game operations by enhancing the customized and refined operations of different game segments. During the quarter, we increased investment in self-produced content and produced close to 160 esports tournaments. We consistently strive to enhance the value of our self-produced tournaments by developing a centralized production and management process and establishing a diversified tournament content system. By hosting LOL Team Fight Tactics, an official collaboration tournament with Tencent, we have discovered many new gaming talents who eventually became professional players. Among all the major new games launched last year, our self-produced tournament for Naraka Bladepoint was selected by Naive as one of its official tournaments. DOU's LOL Wild Rift Master Legend series was also incorporated into Tencent official professional tournament system. Meanwhile, our self-produced tournaments enabled us to support and cultivate our streamers by providing them with elevated levels of exposure and engagement. As we improved our recruitment and training system for streamers, we are able to not only offer our streamers greater career development opportunities on our platform, but also refer our high-potential streamers to professional esports teams. In addition to our advanced system for in-house tournaments, we enrich our content variety through producing customized entertainment tournaments and shows based on the features of individual game segments and streamers' playing style during holidays, major events, and new game version launches. For example, We self-produced an all-star tournament for LOL, inviting top streamers, and all-commerce recruitment tournaments in different game segments, which encouraged streamers and users to participate. Our differentiated offerings of professional tournaments and entertaining game content fulfills the diversified needs of both hardcore and hardcore gamers. Importantly, we also maintain and grow our production of engaging and novel video content. For example, we produced an innovative variety show called All About Games that evaluates new games during their promotional period. The show's content includes fresh coverage of new games, discussion of training topics, game reviews, and other exclusive features. In addition, we also invited famous streamers and other gaming industry-related guests to participate in the show. Production of this type of content enhanced the community experience as we developed high-quality content to enrich our game segment and boost user engagement. Moreover, we found that game developers were willing to cover some of the production costs of these shows as a new channel of promotion. As a result, we not only built a brand new collaboration model with game developers, but also optimized ROI for those game segments. Turning to our cooperation with game developers and distributors, we continued to deepen our cooperation on monetization front with game developers and distributors. For instance, we launched a variety of promotional activities with both Tencent and NetEase to bolster user activity and encourage users to make in-game purchase by offering task-based rewards of in-game items. Moreover, we are consistently devising and exploring new methods of cooperation with game developers, using Dota 2 as an example. we cooperated with game developers to share partial gaming data, and then employed this data to develop a number of practical functions. These functions include real-time display of streamers' performance, gaming data analysis, and multi-screen broadcasting to allow two streamers' performance in the same game to be viewed simultaneously. Enhancing the display function for analyzing streamers' game strategies allowed us to provide an optimized user experience. Looking ahead, we will further improve our operating efficiency by launching attractive distribution algorithms, which directs appropriate levels of exposure to individual streamers based on historical data. As a game-centric platform, we deliver value to our users through consistent production of high-quality content and our exceptional operational capabilities. Building on our advantage in high-quality content and refined operations, we increase ROI by reducing production costs and operating expenses through self-produced content, utilization of partners' resources, joint operations, and more. Going forward, we will continue to evaluate and execute on potential monetization optimizations while improving our platform's overall operating efficiency by enhancing each game's ROI. Now, turning to monetization. Our total number of paying users in the fourth quarter was 6.4 million, with an average quarterly output of RMB 270. the year-over-year decrease in both the number of paying users and quarterly output, one result of our in-advanced operational adjustment and future updates in anticipation of a tightening regulatory environment. As we continue to develop the paying behavior of our co-users and enhance engagement with more casual and new core gamers through sustainable operating strategies and promotional campaigns, that are customized based on the preference of different groups of paying users, we are able to sustain a stable paying user base and a healthy range for our output. Meanwhile, we persisted in our exploration and development of new revenue streams. For example, following our in-depth analysis of the engagement between streamers and users, we upgraded our membership system called Diamond Fans, offering members with more customized privileges and additional functionalities to interact with streamers. Utilizing our self-produced content with such promotional campaigns, we are able to improve the subscription rate of our membership services in certain game segments. Going forward, We will continue to cultivate and expand our membership program as we leverage games' unique features and our individual streamers' distinctive characteristics. In terms of products and technology, we are continuously developing our game-centric community on the product front to meet our users' growing demand for game tips, guides, and walkthroughs we recently launched an innovative function called Streamers QA and Demonstration. For this function, we carried out big data analysis to gather hot topics from our bullet chat and discussion forum, MISA, and packaged the topic as a series of demonstration tasks for streamers. Streamers then take the task and record themselves answering the questions and demonstrating the game tactics as they stream. Finally, this recorded content can be added into show reviews that are available for users to view on demand. By leveraging natural language processing technology, we are able to understand and extract relevant content from BullyChat. This then allows us to push related show videos to users who are asking similar questions. This streamer-produced show videos further utilize the streamer-generated content and enhance the engagement between streamers and users. To summarize, we have executed a robust and sustainable operating strategy while maintaining our leading position in the traditional live streaming industry. Leveraging our outstanding content management team, comprehensive live streaming resources, and our extensive game operation experience, we are able to consistently upgrade our content offerings and optimize our operational innovations. At the same time, we have deepened our collaboration with game developers in multiple dimensions to provide users with content that seamlessly integrates live streaming, video, graphics, and interactive communities. In addition, we continue to augment our user engagement and consumption capabilities while exploring diversified monetization models and improving our financial performance. With that, I will now turn the call over to our Vice President of Finance, Mr. Hao Chao, to go through the details of our financial performance in the quarter.

Thank you, Lingling. Hello, everyone. During the first quarter, we have been focusing on improving our operating efficiency through ROI enhancement and cost controls and achieved encouraging results. The company's gross margin improved and adjusted net loss narrowed significantly on year-over-year basis. Total net revenues in the first quarter of 2022 decreased by 16.6% year-over-year to RMB 1.8 billion. Left streaming revenues were RMB 1.73 billion, a decrease of 13.6% from RMB 2 billion in same period of 2021. The decrease was due to the implementation of prudent operating strategies, such as adjustments to certain interactive features and the related operational efforts. Considering the tightening regulatory environment, we have been making operational adjustments and the feature updates in advance to comply with regulatory requirements for the long-term development of our platform. As a result of these adjustments, virtual gifting interactions were partially impelled, which caused decreases in both the number of paying users with lower app and quarterly app. Our quarterly app was RMB 270, a 5.5% decrease from RMB 286 in the same period last year. Based on analysis, the size of our core paying users largely remained stable and we continue to stabilize the paying habit of our core users and cultivate the paying willingness of mid to long-tail paying users. Advertising and other revenues were RMB 68.4 million compared with RMB 154.1 million in the same period of 2021. The year-over-year decrease was primarily attributable to the continued exploration of new commercialization models by using a portion of advertising traffic that could have been directly monetized as well as the soft demand for advertising caused by macro challenges and regulations aimed at gaming industry. Cost of revenues in the first quarter of 2022 was RMB 1.55 billion, a decrease of 18% compared with RMB 1.89 billion in the same period of 2021. Revenue share fees and the content costs decreased 19.2% to RMB 1.34 billion from RMB 1.66 billion in the same period of 2021. The decrease was mainly due to the decrease in revenue share fees, which is in line with the decreased live streaming revenues and the significant decrease in the cost of broadcasting rights as we seized acquiring overpriced content rights for esports tournaments and our selective copyright procurement strategy. Other content costs also show a year-over-year decline as we continue to optimize in-house content production efficiency. Bandwidth costs in the first quarter of 2022 decreased by 11.8% to RMB 151.9 million from RMB 172.1 million in the same period of 2021. The decrease was mainly due to the year-over-year reduction in peak bandwidth usage in absence of purchased eSports tournament copyright, given our bandwidth costs are generally built based on peak bandwidth usage. Meanwhile, the lower per unit bandwidth costs which benefited from our improved procurement efficiency with major suppliers also contributed to the decrease in bandwidth costs. Cost profit in the first quarter of 2022 was RMB 243.8 million, compared with RMB 260.2 million in the same period of 2021. Gross margin in the first quarter of 2022 improved to 13.6% from 12.1% in the same period of 2021. This margin improvement was primarily due to the significant decrease in the cost of forecasting rights as a percentage of revenues as we ceased acquiring overpriced content rights for eSports tournaments. Sales and marketing expenses in the first quarter of 2022 were RMB 186.4 million, a decrease of 11.2% from RMB 209.9 million in the same period of 2021, which was mainly attributable to the decreased personnel related expenses and branding expenses. Research and development expenses in the first quarter of 2022 were RMB 116.3 million, representing an increase of 4.5% from RMB 111.3 million in the same period of 2021. The increase was primarily attributable to additional investment in technical personnel as the company continues to invest in product upgrades to support its game-centric content strategy. General and administrative expenses in the first quarter of 2022 were RMB 90.1 million, increasing by 2.3% from RMB 88.1 million in the same period of 2021. Adjusted operating loss in the first quarter of 2022 which aspect share based compensation expenses was RMB 68 million compared with RMB 91.8 million in the same period of 2021. Net loss in the first quarter of 2022 was RMB 86.9 million compared with RMB 101.8 million in the same period of 2021. Adjusting net loss in the first quarter of 2022, which excludes share based compensation expenses, share for loss in equity method investments and impairment loss of investments was RMB 52.5 million compared with RMB 70.7 million in the same period of 2021. For the first quarter of 2022, basic undiluted net loss per ADS were RMB 0.27 and RMB 0.27, respectively, while adjusted basic undiluted net loss per ADS were RMB 0.16 and RMB 0.16, respectively. As of March 31, 2022, the company had cash and cash equivalents, restricted cash, short-term and long-term bank deposits of RMB 6,315 million, compared with RMB 6,643 million as of December 31, 2021. We would also like to provide an update on execution of our share repurchase program announced on August 30th, 2021, in which the company may repurchase up to US dollar 100 million of its shares until August 2022. As of March 31st, 2022, the company had repurchased an aggregate of US dollar 33.9 million worth of each ADS under this program. Going forward, we will continue to increase operating efficiency as our top priority in order to reach non-gap-break-even binary losses through cost optimization and improvement of monetization efficiency. Along with the continued improvement of our overall ROIs. We will continue enhancing our monetization capabilities to explore sustainable development of our platform. This concludes our prepared remarks for today. Operator, we are now ready to take questions.