DouYu International Holdings Limited

Good morning and good evening, ladies and gentlemen. Thank you and welcome to DOEU International Holdings Limited Third Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. We will begin 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 third 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 third quarter 2022 financial results on our IR website at rr.doeyu.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 state public provision for the Private Security Litigation 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 these forward-looking statements. 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 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 third quarter, we continued to innovate game content and optimize our operational model. We both retained our current user base and attracted new users by developing high-quality content while optimizing each game segment's rate of return by enhancing existing value-added services and launching new ones. We achieved a second consecutive quarter of profitability on an adjusted basis as we stabilized our revenues, improving revenue quality while augmenting our cost controls and optimizing expenses. This quarter, our MAU numbered 57.1 million, and total revenues were RMB 1.8 billion. Our quarterly paying user count was 5.6 million, and adjusted net profit reached RMB 25.7 million. This quarter, our average mobile MAUs were 57.1 million, a decline of 7.7% year-over-year, but a 2.5% increase quarter-over-quarter. Our steady growth in MAUs for two consecutive quarters demonstrates that the negative impact of our selective corporate procurement strategy has been absolved. Looking back on the third quarter, the changes in MAUs was driven by two factors. First, the execution of our selective corporate procurement strategy led to a year-over-year traffic loss from users who primarily viewed esports tournaments on our platform. This led to a decline in MAUs beginning in the fourth quarter of this year. However, we were able to stabilize traffic by increasing our investment in self-produced content. And the combination of high-quality tournament-related content and streamer content on our platform has helped us retain existing users and attract new ones. For instance, the launch in September of our top streamer tournament in the League of Legends gaming segment was a showcase event for our users and demonstrated the potential of investing in self-produced content. Second, we continue to innovate our membership services, emphasizing their value as an avenue for exploring monetization opportunities outside of virtual gifting. Together with a series of promotional activities, these initiatives partially offset the negative impact of the MAU decline caused by our shift in content procurement policies. We have been upgrading our platform-wide membership service And this past quarter introduced game-specific memberships as well. By integrating game features and gamers' needs into a viable service package, our membership services attract new traffic and motivated inactive users to revisit our platform. Turning to our content updates. In the third quarter saw us further augment a variety of content offerings. including integrated live streaming, videos, graphic content, and community discussions. We brought together popular streamers, game developers, and distributors to organize custom tournaments and shows based on the unique features of individual games. This content offered opportunities for enhanced interaction between users and streamers. And we see this and other initiatives as part of our long-term goal strategy to create a comprehensive game-centric content ecosystem. We endeavor to create a vibrant and healthy gaming community for our users by consistently providing high-quality content and innovative product offerings. Based on huge user base of games and esports, as well as their diverse content needs, we further enrich our content offerings and produced almost 90 esports tournaments this quarter. Drawing upon our experience in organizing professional tournaments, we integrated features typical of pro events into our armature offerings, leveraging our pro-style competition mechanism and inviting official commentators to host the events. We provided our users with a genuine tournament experience featuring games including Honor of Kings and CSGO. As the engagement of girls and women in the gaming community increases, we also produced a series of tournaments exclusive to female users. These tournaments feature the games CSGO, Crossfire, and Naraka Playpoint. And, combined with our streamer recruitment and training system, provided our female users with increased exposure and opportunities. Overall, these tournaments both expanded our user base and increased engagement levels in their respective game segments. We also put in the effort to add entertainment value to our professional competitive gaming content, making it more accessible to a wider audience. For instance, We held tournaments in the LOL gaming segment in partnership with top streamers. Serving as team anchors, these top streamers invited professional esports players and other skilled gamers to team up and compete in live streaming sessions, which garnered widespread acclaim and attention. This type of content featuring pro gamers in entertainment-oriented team play enhances community resonance and engagement in its gaming segment, attracting new users and re-engaging inactive users. Let's now turn to copyrighted content. During our years of rich experience in live streaming official tournaments, we launched diversified promotional activities across a variety of content formats. These formats include live streaming, videos, and graphics related to official game and tournament IP content. At the same time, we explored new models for cooperating with game developers so as to enhance tournament's user stickness and user engagement. For instance, during the KPL Summer Tournament, we collaborated with Honor of Kings game developers to provide membership services exclusively for KPL tournament viewers. Leveraging the partial game data sharing partnership we established in the previous quarter. Incorporating the game feature of KPL, this service was well received and contributed to new user growth. In addition to these innovations, we continue to improve ROI for copyrighted content. Thanks to our initiative to manage operating costs such as by utilizing game developers' resources and conducting joint operations. Now, turning to monetization. Our total paying user count in the third quarter was 5.6 million, with an average quarterly output of RMB 319. As we maintained our efforts to promote rational consumption, we dynamically modified and fine-tuned our platform's tipping functions and operations, including canceling low ROI promotional activities for new paying users. As a result of these changes, our paying user count declined. However, our OO revenue remained stable on a quarterly basis, demonstrating the high stickiness of our co-paying users with more rational and sustainable spending behaviors. More importantly, starting in the second quarter, we made structural adjustments to improve our revenue quality. We enhanced the quality of virtual gifting revenue and made progress in improving our non-virtual gifting revenue. First, we have been updating our platform-wide membership services since its major upgrade at the beginning of this year. During the quarter, we upgraded our member privilege system where members are entitled to extra benefits upon the completion of certain activities on the platform and can enjoy their membership anniversary display in streamers' live streaming channels. The service further enhances the interactive experience between streamers and platform members. We have seen encouraging improvements in our membership fee renewal rate. with the high user stickiness of our loyal fans demonstrating the value added by the service. At the same time, we further explored the potential of new monetization models and achieved meaningful progress in the development of collaborations with game developers. During the quarter, we began launching our innovative game-specific membership service. Users who purchase game-specific memberships on our platform receive basis points, and then they can earn extra points by completing assigned tasks on our platform. Users can exchange accumulated points for in-game items or rewards provided by our platform in select live streaming channels. These promotional activities, which are based on games' unique features, fulfill gamers' demands while enhancing users' stickiness to our platform. reflecting the value of Douyu as a game-centric ecosystem platform. Going forward, we will continue to further explore the needs of users based on different game features and closely collaborate with game developers to discover and expand commercialization models and opportunities. In terms of product innovation and development, we continued to improve our users' viewing experience and foster a game-centric community. During the quarter, we collaborated with Tencent Cloud to create a VR stadium where users can watch esports tournaments. Upon entering the VR stadium through our platform tournament live streaming channel, users can enjoy a variety of interactive features, including viewing games in regular and VR mode, the ability to cheer for and support the participating teams, and special effect gifting. We implemented this feature during the live stream of CSGO EPL, and users showed great enthusiasm in participating. We will continue to refine and upgrade our virtual game viewing experience, further enhancing our users' live streaming experience, and creating new and unique forms of engagement within our user community. Overall, we continue to execute our sustainable development strategy by investing in self-produced content and further innovating our operations. We also remained our deep collaborations with game developers and our commitment to build a healthy and engaging game-centric ecosystem supported by interactive content offerings. The combination of these efforts will ensure the stable development of our traditional business. At the same time, we remain committed to improving our financial performance by actively exploring new monetization models to improve our revenue structure while maintaining the stability of our current revenue streams. We will continue to improve our overall operating efficiency through cost controls and expense optimization. realizing our platform's potential for long-term sustainable growth. With that, I will now turn the call over to our Vice President of Finance, Mr. Hao Cao, to go through the details of our financial performance in the quarter.

Thank you, Lingling. Hello, everyone. In the third quarter, we maintained the stable financial performance of our core live streaming business, while continuing to execute effective cost and expense controls. As a result, we generated an adjusted net profit for the second consecutive quarter. On top of this, we have been investing in new forms of premium content and exploring new monetization channels. We believe that our healthy financial status will enable us to ride out the changing market environment with more flexibility in our operations. Let's now look at our financial performance in more detail. Total net revenues in the third quarter of 2022 decreased by 23.4% year-over-year to RMB 1.8 billion. Live streaming revenues were RMB 1.71 billion, a decrease of 22.9% from RMB 2.21 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 efforts prioritizing the healthy long-term development of our platform. As we seek a more balanced revenue structure, we focus on maintaining our core paying user base. In doing so, we intentionally canceled some promotional campaigns for new paying users starting this quarter, as this provided a low ROI. As a result of the decreased number of paying users, our quality up was RMB 319, a 3.9% increase from RMB 307 in the same period last year. Advertising and other revenues were RMB 93.3 million, compared with RMB 137.5 million in the same period of 2021. The year-over-year decrease was primarily attributable to the continued exploration of new commercialization models, which use a portion of advertising traffic that could otherwise have been directly monetized. as well as the soft demand for brand advertising under the weak macroeconomy. The decrease was partially offset by the increase in other revenues contributed by game-specific membership services. Cost of revenues in the third quarter of 2022 was RMB 1.55 billion, a decrease of 25.2% compared with RMB 2.07 billion in the same period of 2021. Revenue sharing fees and accounting costs decreased 28.3% to RMB 1.32 billion from RMB 1.84 billion in the same period of 2021, which was driven by two factors. First, the decrease in revenue sharing fees outpaced the decrease in live streaming revenues as a result of lower revenue sharing ratio. This demonstrated our ongoing improvements to efficiency as we continue to execute our prudent operating strategies. Second, copyright costs decreased significantly as a result of our selective copyright procurement strategy whereby we cease acquiring overpriced copyrighted content for esports tournaments. Bandwidth costs in the third quarter of 2022 decreased by 17.4% to RMB 135 million from RMB 163.4 million in the same period of 2021. The decrease was mainly due to higher bandwidth efficiency achieved through dynamic bandwidth allocation. Meanwhile, the year-over-year reduction in peak bandwidth usage also contributed to the decrease in bandwidth costs. Gross profit in the third quarter of 2022 was RMB 251.2 million, compared with RMB 278.5 million in the same period of 2021. Gross margin for the quarter expanded to 14% from 11.9%. in the third quarter of 2021, primarily due to two factors. The first was the significant decrease in the copyright costs as a percentage of revenues as we ceased acquiring overpriced copyrighted content for esports tournaments. The second was our lower revenue sharing ratio, which benefited from the improvement in revenue quality and our sustainable operating strategy. Sales and marketing expenses in the third quarter of 2022 were RMB 162.1 million, a significant decrease of 25.9% from RMB 218.9 million in the same period of 2021. This was mainly attributable to the decreases in both marketing expenses for user acquisition and branding expenses. Research and development expenses in the third quarter of 2022 were RMB $84.4 million, representing a 31.5% decrease from RMB $123.2 million in the same period of 2021. This decrease was primarily due to a decrease in personnel-related expenses. General and Administrative expenses in the third quarter of 2022 were RMB 52.3 million, dropping by 39.5% from RMB 86.5 million in the same period of 2021. The decrease was primarily due to decreased share-based compensation expenses, as a vast majority of shares and our share incentive plans were fully vested, as well as decreased professional service fees. Adjusted operating loss in the third quarter of 2022, which aspect share-based compensation expenses was RMB 8.4 million, compared with adjusted loss from operations of RMB 91 million in the same period of 2021. Net loss in the third quarter of 2022 was RMB 6.6 million, compared with RMB 143.5 million in the same period of 2021. The improved gross margin and expense controls combined have led to three consecutive quarters of narrowing losses. Adjusted net income in the third quarter of 2022, which excludes service compensation expenses, shelf loss in equity method investments, and impairment loss of investments was RMB 25.7 million, compared with adjusted net loss of RMB 72.7 million in the same period of 2021. For the third quarter of 2022, basic undiluted net loss per ADS were RMB 0.01 and RMB 0.01 respectively. while adjusted basic and diluted net income per ADAs were RMB 0.09 and RMB 0.9, respectively. As of September 30, 2022, the company had cash and cash equivalents, restricted cash, short-term and long-term bank deposits of RMB 6.87 billion, compared with RMB $6.64 billion as of December 31, 2021. Going forward, we will continue to focus on optimizing costs and improving revenue quality in order to deliver sustainable profitability. We will continue to improve our overall ROIs and enhance monetization capabilities to support the long-term development of our platform. This concludes our prepared remarks for the day. Operator, we are now ready to tell questions.