DouYu International Holdings Limited

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.

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.

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.