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spk04: Good morning and good evening, ladies and gentlemen. Thank you and welcome to W International Holdings Limited Second Quarter 2022 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. Lingling Kong. IR Director at Douyu. Please go ahead, ma'am.
spk10: Thank you. Hello, everyone. Welcome to our second 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 second quarter 2022 financial results on our IR website at ir.w.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 safe harbor provision for the Private Security Litigation Reform Act of 1995. These forward-looking statements are based on measurement current 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 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 statements for select events or circumstances after the date of this conference call. I will now speak on behalf of our chairman and CEO, Mr. Xiaojie Chen. In the second quarter, we continued to explore new growth drivers while increasing our investment in self-produced content. In addition, we tightened our cost controls and improved revenue quality by structural adjustment of our revenue stream, resulting in a profit turnaround for the quarter. This quarter, our mobile MAU was 55.7%, total net revenues were RMB $1.83 billion and quarterly paying user count was $6.6 million. By prudently adjusting our corporate procurement strategy and deftly implementing cost control, we increased our gross margin to 6.9%. Meanwhile, we made solid progress in improving operating efficiencies as our adjusted net income reached RMB $23 I'm pleased to share with you that we have achieved our goal of maintaining stable mobile MAUs from the fourth quarter of the year through the second quarter. During the quarter, average mobile MAUs was 55.7 million, a decline of 8.2% year-over-year, but an increase of 1.1% quarter-over-quarter. We believe that the two factors that work. As we execute on our selective corporate procurement strategy, we have ceased acquiring overpriced content rights for esports tournaments starting in the fourth quarter, which led to a year-over-year decline in MAU caused by traffic loss from users who primarily view tournaments on our platform. Though the loss in tournament users negatively affected our MAU base, it only had a very limited impact on our revenue. The second quarter of the year is the traditional peak season for official tournaments, with a high number of users on live streaming platforms viewing tournaments compared with the fourth quarter. Therefore, it is very difficult to stabilize quarter over quarter traffic in the absence of certain official tournaments on our platform. However, thanks to our high-quality streamers' segmented and refined content, such as self-produced tournaments, we retained old users and attracted new users during the quarter. As a result, our mobile MAUs achieved a sequential increase, indicating that the negative impact of our selective corporate procurement strategy has been fully realized and absorbed by our business. Second, we collaborated with game developers to launch promotional activities to attract new platform users, partially offsetting a portion of the decrease in MAUs that resulted from our no longer purchasing certain copyright content. For example, we launched a promotion in our live streaming channel with the game developer of Peacekeeper, where users can purchase the most popular in-game items within a limited time period. This promotion successfully attracted a significant number of gamers to participate, which contributed to the growth of new users and galvanized the return of some inactive users. Turning to our content updates. During the second quarter, we maintained the effective execution of our strategy of building a game-centric comprehensive content platform. while further investing and innovating in self-dued content. Based on users' differentiated preferences and game features, we collaborated with well-known streamers, game developers, and distributors to customize high-quality IP content shows, further enriching our content ecosystem by integrating live streaming, videos, graphics, and interactive communities. In the second quarter, we continued to enhance the diversified content system for our self-produced tournaments and increase investment in self-produced content with a focus on refining content and operations based on game categories. We produced close to 95 esports tournaments in a quarter to meet the differentiated needs of our users. These tournaments can be divided into two categories. the fourth of which is professional or streamer tournaments for hardcore gamers. The second category is amateur tournaments for competition between our loyal users among college students and casual competitions for light and me-core gamers. Leveraging our years of experience in operating esports tournaments, our self-produced professional tournaments received widespread acclaim from both game developers and hardcore gamers. During the quarter, our self-produced Douyu 5th Honor of Kings Master Tournament was once again selected by the game's developer as its official collaboration partner. For the first time, users were able to participate in this tournament through an innovative combination of online and offline formats, increasing user engagement and creating an honor of kings tournament as those intellectual property that can be enjoyed by every user category. With the popularization and the deeper penetration of esports, we have created and developed more unique and differentiated tournaments that are open to all comers. In order to cater to diverse user demand, we organized a variety of differentiated events including college selective trials to discover top gamers, LOL Team's fans competition, and the 5v5 Festival for Honor of Kings. This event attracted both new and regular users by inviting well-known guests to attend and by using novel methods of competition and unique ways for players to team up. During tournament's promotional and hosting periods, we stimulated a second round of active discussion between different platforms and communities by promoting warm-up campaigns and tournament post-match highlights. By doing so, we further enhanced user engagement and created an exciting and absorbing environment on our platform. Regarding our previously purchased copyrights, we continue to collaborate closely with game developers and integrated official tournaments with our live streaming, videos, graphics, operating activities, and community discussion to increase user engagement and attract new users. Using KPL's Spring Tournament as an example, we self-produced several shows derived from tournament IP content. In addition, the KPL esports team was signed and invested in Wuhan E-Star won the Spring Season Championship. Going forward, we will continue to execute our selective corporate procurement strategy and make purchases of cost-effective content. We will analyze and evaluate the ROI for each tournament based on metrics such as traffic contribution, revenue contribution, and cost. In addition to tournament content, we continue to create entertaining gaming content. We developed and released China's first live streaming gaming knowledge quiz show, Gaming Expert. More than 120,000 users participated in the online quiz contest, which attracted over 8 million live viewers. Furthermore, as we increased our investment in high-quality gaming content and the development of our diverse content ecosystem, we continued to refine our operations and successfully raised ROI for our game segments by improving revenue quality and implementing content cost controls. We successfully enhanced our platform's overall operating efficiency while still delivering innovative premium content and maintaining our advantage in game-centric operations. Now, turning to monetization. Our total paying user count in the second quarter was 6.6 million, with an average quarterly approval of RMB 276. In the context and trend of promoting rational consumption in live streaming, we proactively adjusted and refined our platform's tipping function and operations, and we have been making ongoing changes to maintain compliance with the latest regulation guidelines. As a result of these modifications, our paying user count and output declined on a year-over-year basis, but remained stable on a quarter-over-quarter basis. As a matter of fact, this adjustment and optimization actually increased the quality of our virtual gifting revenue and improved sustainability by encouraging healthier paying habits among users. For example, by utilizing customized promotional campaigns based on the preference of different user groups, we continued to stabilize our co-users' willingness to spend and enhanced casual and mid-core gamers' engagement to cultivate their paying habit. By adopting more sustainable operating strategies, we have been able to maintain a stable paying user base and sustain a health range for our outputs. Meanwhile, we continue to explore and develop our membership services, as demonstrated by a healthy sequential growth in the second quarter since they upgraded Diamond Fund's membership system in the previous quarter. Our membership service is an important interactive tool to maintain the interaction between our streamers and their fans. As such, we continue to release additional value-added features including streamers' emoticons and diamond finds avatars that are exclusive to diamond finds and are related to games' unique features and streamers' distinctive characteristics. This has further enhanced the stickiness of fans and increased the willingness of users to subscribe to membership services. Going forward, we will continue to explore new and diversified monetization channels. In terms of technological innovation and development, we have been strengthening our in-depth cooperation with game developers. Last quarter, we cooperated with Dota 2's game developer to share partial gaming data and then employ this data to develop a number of practical functions. During this quarter, we extended our cooperation scheme so that now we also share partial gaming data with the developer of Honor of Kings. we launched customized features that allow users to actively display game achievements and rankings on our platform with users' consent. By connecting their gaming accounts with their Douyu account, users' game achievements, such as gaming badges, can be displayed when they participate in Bully Chat. Sharing gaming information in this way improves user experience by fostering further connection between gamers and streamers in a variety of different scenarios. In addition, our collection of gaming data and platform user behavior made it possible for us to leverage machine learning technology to provide more accurate content recommendations for game users with different characteristics. Overall, based on the stable performance of our traditional live streaming business, we increased our investment in self-produced content and optimized our operational innovations to better target and customize our content based on user preferences and game features. Furthermore, we deepened our collaboration with game developers so as to further augment our content offerings of integrated live streaming, videos, graphics, and interactive communities we're continuing to develop a robust and healthy game-centric ecosystem. In regard to financial performance, we enhanced our monetization capabilities, explored new monetization models, and improved overall operating efficiency by implementing effective cost controls and expense optimizations. Through the consistent ROI enhancement of each game segment, we are realizing our platform's potential for long-term and sustainable growth. With that, I will now turn the call over to our Vice President of Finance, Mr. Hao Tao, to go through the details of our financial performance in the quarter.
spk03: Thank you, Lingling. Hello, everyone. Last quarter, we stated that our top priority was to reach non-GAAP block even by improving operating efficiencies. I'm delighted to see that our performance exceeded our expectations. During the second quarter, our gross margin further expanded to 16.9%, and we recorded an adjusted net income of RMB 23.5 million. This demonstrates the effectiveness of our execution on operating efficiency improvements through refined ROI enhancements. and effective cost and expense controls. Total net revenues in the second quarter of 2022 decreased by 21.6% year-over-year to RMB 1.83 billion. Live streaming revenues were RMB 1.77 billion, a decrease of 18.8% from RMB 2.18 billion. in the same period of 2021. The decrease was due to the continued implementation of prudent operating strategies, such as adjustments to certain interactive features and related operational efforts. For the long-term healthy development of our platform, we have made operational adjustments and feature updates in advance and have been highly responsive the newly announced guidelines in order to fully comply with regulatory requirements. As a result of these adjustments, virtual gifting interactions were partially impelled, which caused year-over-year decreases in both the number of paying users and quarterly up. However, the number of paying users and quarterly up remained stable at the current level as we continue to stabilize the pain habits of our core users and cultivate the pain willingness of mid to long-tail pain users. Our quarterly up was RMB 276, an 8.7% decrease from RMB 303 in the same period last year, but a 2.4% increase on sequential basis. Advertising and other revenues were RMB 64.9 million, compared with RMB 158.7 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 advertisements coupled with the COVID resurgence in China. Cost of revenues in the second quarter of 2022 was RMB 1.52 billion, a decrease of 24.9% compared with RMB 2.03 billion in the same period of 2021. Revenue share fees and content costs decreased 27.2% to RMB 1.31 billion from RMB 1.81 billion in the same period of 2021, which was driven by several factors. First, the decrease in revenue sharing fees outpaced the decrease in live streaming revenues, leading to a lower revenue sharing ratio. This demonstrates the effective execution of our prudent operating strategies with a focus on efficiency improvements. Second, the cost of broadcasting rights decreased significantly as we seized acquired overpriced content rights for esports tournaments and our selective copyright procurement strategy. Third, other content costs also required a year-over-year decline as we continue to optimize in-house content production efficiency. Bandwidth costs in the second quarter of 2022 decreased by 11.2% to RMB 143.7 million from RMB 161.8 million in the same period of 2021. The decrease was mainly due to a year-over-year reduction in peak bandwidth usage in the absence of purchased esports tournament copyright, given that our bandwidth costs are generally billed 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 a decrease in bandwidth costs. Gross profit in the second quarter of 2022 was RMB 309 million, compared with RMB 306.5 million in the same period of 2021. Gross margin in the second quarter of 2022 expanded to 16.9% from 13.1% in the same period of 2021, a sequential improvement of 330 basis points from the first quarter. This margin improvement was primarily due to the significant decrease in the cost of broadcasting rights as a percentage of revenues, as we ceased acquiring overpriced content rights for esports tournaments, as well as the lower revenue sharing ratio, which benefited improvement in revenue quality and our sustainable operating strategy. Sales and marketing expenses in the second quarter of 2022 were RMB 167.5 million, a significant decrease of 43.2% from RMB 295 million in the same period of 2021. This was mainly attributable to the decreases in both marketing expenses for user acquisition and personnel-related Research and development expenses in the second quarter of 2022 were RMB 101.9 million, representing a 17.2% decrease from RMB 123 million in the same period of 2021. The decrease was primarily due to the reduction in personnel-related expenses. General and administrative expenses in the second quarter of 2022 were RMB 90.7 million, decreasing by 11.7% from RMB 102.6 million in the same period of 2021. The decrease was primarily due to the decreased professional service fees. Adjusted operating income in the second quarter of 2022 which expect service compensation expenses was RMB 0.3 million, compared with adjusted loss from operations of RMB 165.1 million in the same period of 2021. Net loss in the second quarter of 2022 was RMB 38.8 million, compared with RMB $181.7 million in the same period of 2021. The expanded gross margin and decreased expenses combined to deliver two consecutive quarters of narrowing losses. Adjusting net income in the second quarter of 2022, which excludes share-based compensation expenses, share of loss in equity method investments, and impairment loss of investments was RMB 23.5 million, compared with adjusted net loss of RMB 145.1 million in the same period of 2021. For the second quarter of 2022, basic and diluted net loss per ADS were RMB 0.1 and RMB 0.1, respectively, while adjusted basic and diluted net income per ADS were RMB 0.1 and RMB 0.1, respectively. As of June 30, 2022, the company had cash and cash equivalents, restricted cash, short-term and long-term bank deposits of RMB 6,685 million, compared with RMB 6,643 million as of December 31, 2021. Going forward, we will focus on delivering sustainable profitability through our continued operational efforts on cost controls and improvement of revenue quality. Along with the ongoing improvement of our overall ROIs, we will continue enhancing our monetization capabilities to support the long-term development of our platform. This concludes our prepared remarks for today. Operator, We are now ready to take questions.
spk04: Thank you. 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 keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Li Zeng with Bank of America.
spk01: Hi, good evening. Thank you for accepting my question. I have two questions. The first one is to ask the manager to introduce the actual situation of the live broadcast in May and how we see the impact on our overall income. Thank you for taking my question. Two questions here. First, any updates on the live streaming regulation launched in May? And can you share with us its impact to our business? Secondly, on your current operation in esports tournaments and any change in our future plan in the license for esports content. Thank you.
spk05: Let me answer your first question. Seven measures were included in the latest regulations on virtual gifting, including protection of miners, ranking systems, and peak vectors. After analyzing the guidelines, we believe that The purpose is to guide users to spend rationally by limiting certain features. In the context of the trend of promoting rational consumption of live streaming users during May, we implemented a series of measures, such as setting up a keeping limit for a single transaction on virtual gift, and a pop-up requesting a second confirmation for each transaction. In June, we continued to update our platform status according to the latest guidelines. This update included adjusting our ranking system in regards to multi-dimensional data limiting PK time during peak hours and adjusting rewards for PK months. This adjustment to our operations have led to an improvement in the quality of our revenues. By implementing positive and healthy operating spend dates, our development focus has shifted from generating total revenue growth to creating high-quality revenue growth by stabilizing the spending habits of our core users and attracting small, mid, and long-tail paying users with lower IRPQ. We have been carrying out these structural adjustments since the end of 2021. Therefore, we do not anticipate significant incremental negative impacts on our overall revenues based on the operating performance since the latest state update in June. Thank you.
spk04: Thank you. The next question comes from Alex Poon with Morgan Stanley.
spk10: Excuse me. Hi, operator. We are still answering the second question.
spk09: We are still answering the second question.
spk10: Currently, our eSports tournament's broadcasting rights cover a variety of popular games such as Honor of Kings, Crossfire, Dota 2, etc. For this purchase tournament's content, we further diversify our content offerings by integrating live streaming with video, graphics, and interactive communities to meet our users' differentiated needs.
spk09: value, and then finalize the final price of the copyright. At the same time, we are also deepening cooperation with more manufacturers, through various modes of resource exchange, as well as joint operation and other optimized cost methods, to actively explore more business opportunities to increase the content revenue of the copyright, and from there to improve the investment return of the copyright. Under this strategic guidance, we have already opened up the idea of copyright cooperation with many manufacturers.
spk10: The gaming content industry in China has developed into a healthy growth stage, and we anticipate that the pricing of esports copyrights will gradually fall back into a reasonable range in the near future. Therefore, we will carry on executing our selective copyright procurement strategy, our bids for those copyright purchases, will be based on a through evaluation of the monetization capability and the traffic contribution driven by each esports tournament broadcasting rights. At the same time, we will deepen our cooperation with game developers through utilization of partners' resources and joint operations to control content costs. Under this strategy, we are inactive in negotiations regarding more copyright partnership with game developers.
spk09: As we mentioned before, the game content is a part of the competitive version. As more and more users choose the game, we believe that the difference in content will lead to an economic operation, which is the key to platform stability and growth. In the absence of this part of the important competitive content, we maintained growth in the second stage of the MAU. This data shows the correctness of the competitive strategy. In the future, based on our in-depth understanding of the game industry and many years of operating experience, As we mentioned earlier, eSports tournament broadcasting is only one part of our comprehensive gaming content. As viewers see more and more viewing options,
spk10: We believe differentiated content and refined operations are the key to our platform's stable and healthy growth. Despite the absence of some important esports tournaments, our average mobile MAUs achieved quarter-over-quarter growth, proving that our selective corporate procurement strategy is a step in the right direction. By leveraging our deep understanding of the gaming industry, years of operating experience, and leading in live streaming resources, we will continue to expand deep in our cooperation with game developers. At the same time, we will further invest in game-centric self-produced content while maintaining our advantages in high-quality content and game operations to stabilize traffic on our platform. Thank you. I'll pray here. We're ready for next question.
spk04: Thank you. Our next question comes from Alex Boone with Morgan Stanley. Please go ahead.
spk08: We have emphasized this content many times. I would like to ask the management team to introduce how to create this content, especially how we can ensure the quality of this content. Thank you. This is the first question. The second question, I would like to ask, since April, we have seen that number 8 has returned. Recently, has the number 8 returned to our traffic? Thanks management for taking my question. My first question is related to our self-produced content. Can management share their view how we produce self-developed content and how do we ensure the quality of these contents? My second question is related to game license approval. Since approval has resumed in April, Has that been helping our traffic growth and revenue growth? Thank you.
spk09: In terms of the self-sufficiency content, as a game-based diversified content platform, whether our content can meet the needs of users and whether we can build up the atmosphere of the game has become the key to attracting users and storing users. So our users are our most precious resources. From the user's point of view, it allows us to carry out some upgrades to content testing and product testing. In terms of game content, players are more interested in the game. They like the competitive stream of streamers and professional players. More pro players are more inclined to enjoy the game itself. In addition to streamers' technical strength, they also enjoy the atmosphere created by streamers. Therefore, we have different user preferences, and we have different game content. We created a professional self-proclaimed game for the players. We showed the players' competitive strength and improved their viewing of the game. Among them, the high school players are one of the most popular players in eSports. They are also one of the most popular players on our platform. In this season, we held the Zhai Xing Cup of Wang Junliao. We had a collaboration with eight famous high schools. A famous coach from each district attracted the attention and discussion of high school players. Regarding the self-produced content, as a giving-centric platform with diverse content, the key to attracting and retaining users are satisfying their viewing needs and creating an engaging community environment for them.
spk10: Because users are the most important component of our platform, we are motivated to make content and products upgrades from their perspective. In terms of gaming content, different user groups look for different kinds of gaming content. Hardcore gamers focus more on the competitive aspect of games and prefer streamers who are professional and highly skilled. Casual gamers, on the other hand, will have a better experience with streamers can create an enjoyable atmosphere during live streaming. So therefore, we design different tournament content to cater to different user preferences. For hardcore gamers, we produce tournaments with focus on presenting streamers outstanding gaming techniques to provide a professional skill-oriented viewing experience. A part of Hardcore Gamers are college students who are also our co-users of our platform. In the second quarter, we held a StarCup Honor of Kings tournament in collaboration with eight well-known colleges and coached by several famous streamers. It was highly popular and much discussed among college students. Up to the end of the second quarter, we have cumulatively hosted nearly 700 esports tournaments involving more than 700 colleges, giving Douyu's brand strong appeal and influence among college students.
spk09: Thank you. We invited LPL professional players and professional players to explain the tournament and enhance the professionalism and spectatorship of the tournament. When organizing entertainment-based tournaments, we focused on enhancing user engagement and interaction. During the quarter, we produced the top LOL fans tournament,
spk10: which was designed for fans of League of Legends Pro League. We recruited more than 450 fans representing 16 professional LPL teams, then gave them the stage to honor their favorite team by fighting for victory in the tournament. As the first large-scale fan tournament in the industry, we invited professional LPL commentators and professional players to commentate on the tournament. adding depth and assurances to the viewing experience. In addition, we also hosted a five-way-five festival for all of the kings and invited stand-up comedians, popular streamers, and fans to team up playing the game while they livestreamed. This casual event naturally became a huge party involving streamers, users, platforms, and game developers.
spk09: We have integrated live broadcasts, video graphics, community discussions, and three-dimensional content structure in our multi-year competition theme. We have planned to warm-up and promote different subjects at different stages of the competition, both in and out of the stadium. We have achieved good results. From the performance of the game area data of the platform, the game area data of the competition theme has improved significantly compared to the past.
spk10: We have now fully integrated our co-live streaming content within our diverse tournament content system, coupled with videos, graphics, and community discussion. This comprehensive content system supports various promotions through different mediums, different platforms, and at different stages during this event, and achieves solid results. We have observed growth in viewing traffic, longer viewing hours, and more interactions using BullyChat during our self-produced tournaments when compared to the typical levels in this gaming segment.
spk05: Let me answer your second question about the new game abroad. We were pleased to see the adoption of a new game abroad. It seems that the gaming market is developing towards diversification and sophistication based on the general and number of recently approved games. In the long run, we believe that this development will be beneficial for the gaming industry and for gaming content platforms like Douyu. As high-quality games and engagement gamers are our primary source of content and users, as more new games are being approved, game developers are starting to resume promotional campaigns in response to new game releases. We adjusted our focus from generating advertising revenue to deeper collaboration with game developers. By providing support through our products' content and resources, we helped developers increase their game exposure and improve download conversion rates while increasing our competitive in the industry. For example, two new games we promoted in the second quarter, LOL Esports Manager and Life of Death NIPPAR 2 achieved entire results in terms of number of games pre-registration and activation. Thank you. Operator, please next question.
spk04: Thank you. Our next question comes from Thomas Chong with Jefferies.
spk06: Fans management for taking my question. We have just talked about our copyright content procurement strategies and the negative impact to MAU is gradually fade out. So just want to get some more color about the work that we have done to achieve this outcome. Thank you.
spk09: That's right. We have decided to implement a strategy of selectively purchasing market share rights and then gave up on purchasing the market share rights that are too high. Previously, we predicted that we would lose some of the users who are mainly watching the game. So we have made a lot of work to stabilize the traffic flow. For example, we have added some of our own content. On the other hand, we continue to update the data of the game without the game version. And the corresponding quick adjustment content supply plan. Then we make the overall MAU performance of the brand When we made the decision to execute our selective corporate procurement strategy, we expected that we would lose some users who primarily
spk10: watch official tournaments on our platform in the absence of some overpriced tournaments. We went forward with the move as part of our overall strategy to stabilize traffic, such as increasing our investment in self-produced content. Meanwhile, we kept close track on the performance of the game segments that locked official tournaments in order to swiftly adjust our content offerings and operations. Thanks to these countermeasures, our platform's mobile MAUs performed better than we had anticipated, especially in the second quarter during which more official tournaments were held, and we see a quarter-or-quarter increase in mobile MAUs as opposed to an expected decline.
spk09: And the performance of the user behavior is also in line with our previous expectations. Most of the lost MOUs are on the platform, mainly for users who are watching the game. The main message source of the platform is for users who have long-term stability and continue to watch the live broadcast content. The storage of such users is high, and the viewing time is long. and the maximum number of users. The content of the excellent streamers is very sticky. Based on the stable streamer content structure, we have joined forces with different streamers to strengthen the deep cooperation with the game market, and launched innovative content and rich operating activities. In the English League, we launched a series of professional and entertainment contests. The overall content of the streamers, such as the market view and interactive data, is also stable. In the Peace Elite, we have launched live live-action live-action live-action live-action live-action live-action live-action live-action live-action live-action live-action live-action live-action live-action live-action live-action Moreover, user behavior has been consistent with our expectations.
spk10: Most of the MAU decline we experienced as a result of our new corporate procurement strategy were users who came to our platform mainly to watch official tournaments. Our platform's main source of traffic, on the other hand, are long-term, continuous, stable users who came to watch streamers' content. This large quantity of high-quality users are characterized by their high retention rate, longer viewing hours, and stickiness to high-quality live streaming content. Leveraging our stable streamer structure, we work with streamers of different characteristics to launch creative content and diversify our promotional activities based on the deepened collaboration with game developers. In the LOL segment, we launched a series of promotional and amateur tournaments so as to maintain the number of viewing hours and interactions for our self-produced content at a stable level. In the Peacekeeper segment, we collaborated with game developers to launch limited promotions for in-game items during livestreams. This not only attracted new users, but substantially increased the number of viewing hours and interactions of self-produced content. Since we have successfully stabilized our co-user base and being able to attract new users to combine operations of utilizing streaming resources and self-produced content, we believe the negative impact from the absence of certain tournament copyrights has fully absorbed. Operator, next question please.
spk04: Thank you. Thank you. The next question comes from Yiwen Zeng with China Renaissance.
spk00: Hello, I'm Yiwen Zeng. Thank you for accepting my question. I have two questions. The first one is that we will carry out some more commercial exploration. Can you tell us more about the progress of our membership business and other business exploration? The second question is about our profit margin. Thank you for taking my question. I have a couple questions first regarding the monetization. In preparing last you mentioned we are exploring a more diversified monetization. Can you discuss like In more details, for example, what the latest progress on our membership is, and other monetization we are exploring. And then, similarly, our gross profit margin, we note a solid improvement in this quarter. Can you discuss the drivers behind, for example, how much is attributable to that content cost saving, and how should we look at the whole year gross profit margin trend? Thank you.
spk03: As to the first question about new business model, we have been exploring new models of commercialization with the goal of both increasing virtual gifting revenue and exploring other revenue streams beyond virtual gifting. Here are some examples. In the last quarter, we upgraded our Diamond Funds membership system, which is designed to increase virtual gifting revenue by enhancing engagement between Diamond Fans users and streamers. Upon membership subscription, users gain access to additional value-added services and gain more opportunities to interact with streamers based on the gaming scenarios. Streamers provide exclusive in-game advice, services, and rewards for Diamond Fans users. This quarter, We improved the system by providing more customized features for users based on streamers characteristics, which further enhanced users' loyalty and improved memberships paying ratio. Numbers of membership subscription grew healthily quarter of quarter with steady improvement of renewal rates. Going forward, we will build an integrated membership system that offers platform privilege, interactivity with streamers, and game benefits in a single package. In addition to the service that we offered on platform, we will also strengthen our collaboration with game developers to provide more value added benefits for Diamond fan users. In terms of advertising models, we continued to refine the aforementioned smart distribution system as a supplement to traditional direct response advertising and display advertising. The current goal of this system is to improve the conversion rate from game viewership to game downloads. A smart distribution system platform enables game developers to release promotional tasks while allowing streamers to choose their preferred method for promoting games. This lets streamers enjoy greater flexibility while fulfilling their task-based promotional obligations. So far, the system is progressing well and has proven to be effective both in promoting version updates and galvanizing the return of active users to mature game titles. About the second question on margin and cost structure, the decrease in cost of revenues is mainly attributable to a 27.2% year-over-year decrease in revenue sharing fees and content costs. The year-over-year decrease in revenue sharing fees is mainly the result of decreased live streaming revenue and also a small decline in overall revenue sharing ratio. Since the beginning of this year, we have been implementing more sustainable and steady operating strategies, which are meant to guide live streaming users to spend rationally. We focused on improving operational efficiency to improve our revenue quality by reducing those of our operations with poor revenue generation. As a result, revenue sharing ratios have declined for two consecutive quarters. We expect that our overall revenue share ratio will remain at the current healthy level with only slight fluctuations between quarters as we further adjust our revenue generating operations. The decrease in content costs mainly resulted from lower copyright fees, optimization of streamer payroll and a reduction in self-produced content costs. The reduction in copyright costs was mainly the result of us seizing our acquisition of certain large-scale tournament content rights, such as LPL. In terms of streamer payroll, we have been continuously optimizing our streamer resources for some segments, leading to a year-for-year decrease in the second quarter. On the self-produced content front, as we utilize a variety of methods to reduce our costs, such as resource integration and joint operations, we continue to focus on the improvement of content quality rather than quantity. As a result, we were able to launch more self-produced tournaments while lowering production costs on a year-over-year basis. Looking forward, we will prudently evaluate our procurement decisions for large-scale tournaments, optimize our streamer payroll structure, and increase our investment in self-produced tournaments and PGC content, for which we control the related production costs. We expect a certain degree of decrease in our content costs this year. Overall, we expect our gross margin will improve at a modest pace for the year 2022.
spk10: Thank you. Operator, we are ready for next question.
spk04: Thank you. The next question comes from Brian Gong with Citigroup.
spk07: Good evening, Guan Yicheng. Thank you for accepting my question. The company's operating expenses have dropped significantly in recent months. Can you share with us the main reasons for the reduction in operating expenses and the trend of future operating expenses? I will translate myself. Thank you for taking my question. We have recorded a decent decline on our OPEX. Can management share the privacy analytics and the trend in the second half of this year and the future? Thank you.
spk03: In the second quarter, overall operating expenses decreased on a year-by-year basis, among which sales and marketing expenses showed a significant decrease as compared to the heightened promotional expenses for new products and features in the same period last year. At present, We are performing continuous and cost-efficient data analysis to select the appropriate promotional channels to increase marketing efficiency. We expect our promotional costs to remain at the current level for the foreseeable future. Besides the above-mentioned marketing expenses, a major component of our operating expenses is payroll. This quarter, we adjusted and optimized our staff structure According to evaluations for each division, overall, we achieved a certain level of cost-saving on payroll expenses year-over-year. For the remainder of the year, we will further optimize payroll expenses and operating expenses while ensuring stable business operations, allowing us to gradually realize a narrow net loss. Thank you.
spk04: Thank you. That's all the time we have for questions. I will now turn the call back over to management for closing remarks.
spk10: On behalf of the management, thank you for joining our call. We look forward to speaking with everyone next quarter.
spk04: Thank you. That does conclude the call today. Thank you everyone for attending. You may now disconnect your line.
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