DouYu International Holdings Limited

Good morning and good evening, ladies and gentlemen. Thank you, and welcome to DALU International Holdings Limited's fourth quarter and full year 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. I will now turn the call over to the first speaker today, Ms. Lingling Kong, IR Director at Zhaoyu. Please go ahead, ma'am.

Thank you. Hello, everyone. Welcome to our fourth quarter and three-year 2022 earnings call. Joining us today are Mr. Xiao Jieqian, 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 and full year 2022 financial results on our IR website at ir.doey.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 Harbor provisions for the Private Security Litigation Reform Act of 1995. These forward-looking statements are based on measurement, 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 are 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 selective events or circumstances at the stage of this conference call. I will now speak on behalf of our Chairman and CEO, Mr. Xiaojie Chen. Throughout 2022, against the backdrop of a complex and volatile macro environment. We remain committed to our long-term growth strategy of fostering a vibrant game-centric content ecosystem. We ended the year with a stable business performance achieved through a mix of operational adaptation and innovation that included optimizing our revenue structures, streamlining our operations, creating new services, and enhancing monetization capabilities. In the fourth quarter, we continue to produce premium gaming content, upgrade our content operating model, and improve the interactive features on our platform to further enhance user engagement. Our mobile MAUs grow slightly on a sequential basis to 57.4 million during the quarter, with the total number of paying users of 5.6 million and our adjusted net loss was RMB 4.3 million. Through a couple of strategic adjustments over the past few quarters, our ecosystem has been shown to be healthier, which we believe it will empower us to deliver long-term sustainable growth. As we progress further into 2023, we are continuing to enrich our content with community interaction playing a key role in our ecosystem. We are shifting the focus of our user growth strategy from increasing scale to improving quality without being overly concerned about the short-term growth of our business. Furthermore, we will optimize our marketing strategy through strengthened partnership with game developers, coupled with our interactive gaming content community to enhance user engagement. In addition, with the price level of copyrighted tournaments gradually returning to a reasonable range, we believe that prudently purchasing some co-corporate tournaments will help us cement our overall competitiveness in the industry. This investment will also foster the ecosystem of our game-centric community and enhance our co-users' engagement and retention rate. thereby facilitating the company's long-term development. Next, I'd like to share with you our business update from the fourth quarter in more detail. For software, our average mobile MAUs for the quarter were 57.4 million, a slight sequential increase despite a year-over-year decline of 8 points. The main reasons for the year-over-year and quarter-over-quarter MAU changes include, first, Due to the implementation of our selective copyright procurement strategy in early 2022, we experienced a decline in OOMAU since the fourth quarter of the year. Nevertheless, in the fourth quarter, despite the negative impact on user traffic from the absence of the LOL World Championship tournament, our creative event campaigns and operations on existing copyright tournament events effectively attracted and engaged our core users. As a result, mobile MAUs on our platform achieved growth for the third consecutive quarter. Second, we continue to advance our innovative membership business, extending our game-specific membership services to broader game segments. By combining game features with users' needs, This initiative has gained traction among both new and existing users. Moving on to our content ecosystem. Capitalizing on the widespread popularity of eSports, we continued to sharpen our products and operations, including the consistent upgrades of our game content. Based on gaming features, we continuously created an even broader selection of more interactive and engaging premium content. On top of that, we built a healthy and vibrant interactive ecosystem for users through innovative services, providing them with a community-based platform and a novel membership business. This effort can not only ensure long-term retention by meeting certain gamers' needs for upgraded game content but also increase overall user engagement and thickness on our platform. That's driving user growth in the long run. In the fourth quarter, we continue to improve our diversified self-produced tournament system and organize more than 90 esports tournaments. Leveraging our top-tier streamer resources, we focused on promoting IP content in partnership with Stargame streamers. In this effort, we created a series of premium gaming content combined with entertainment-oriented activities in our game segment, such as League of Legends and Order of Kings. This content in general, coupled with the training topic, is proven to increase users' motivation to engage in interactions and liven up our game community, appealing to both new and existing users. Self-produced tournament has become one of our main avenues to promote esports popularity across the board. For example, based on Honor of Kings' large gamer base, we held the Zhaoyu Honor of Kings Junior Cup National Challenge. This competition opened enrollment to all Honor of Kings players and boosted easy access to rewards and wider user participation. Specifically, we integrated the tournament content with our user community. Users were able to enroll, participate, and advance in rank within our community channel, while other users could take part in a series of fun activities such as a quiz, a single-player competition, and interactive rewards. Combining game content with our user community captivated my life gamers. And at the same time, it tightened bonds with heavy users. As we improved our self-produced tournament system and fully enhanced its value, we launched a series of eSports talent selection mechanisms based on this tournament. In the EUA Cup mentioned earlier, we unveiled the eSports star project. We've seen growth opportunities to discover high-potential streamers and fortify users' dignity. In the fourth quarter, we launched the Douyu Esports School Team Selection Season for Colleges. The competition covered three mainstream esports games and attracted more than 2,000 college teams from 11 provinces, providing more college esports fans with a platform to showcase their skills. It has also helped us to discover potential esports talent and enhance Douyu's appeal and brand influence among colleges and universities. In terms of copyright determinants, we reinforce user engagement and stickiness through rich derivative content and diverse operational activities. In the honor of King's Champions Cup KIC, we added auxiliary functions such as home team support and a working reminder to further elevate our user experience. Moreover, the team Wuhan E-Star, which we signed and invested in, maintained its excellent performance throughout the years and became the champion of the Champions Cup. With the purchase of some co-corporated content, we continue to deepen cooperation with game developers fully integrating tournament content with our platform's operational characteristics to provide differentiated tournament-derived content and customized user services. Meanwhile, aligning with this tournament content, we will explore more commercialization channels to improve the ROI of tournament copyright. Moving on to our monetization strategy. Our total number of paying users in the fourth quarter was 5.6 million, with a quarterly average up-full of RMB 293. We continued our paying user segmentation strategy from last quarter, which included canceling marketing activities for new paying users with low rates of return, maintaining our co-users' willingness to pay, and promoting more consumption of mid-range paying users. We also made progress in generating revenue from non-virtual gifting. Fourth of all, we continue to refine and promote our platform-wide membership service system, strengthen the companionship and interaction between streamers and platform members, and consistently iterated membership features. In the fourth quarter, we launched sound effects and privilege gifts for members, leading to a sustained study increase in members' renewals compared with the third quarter, demonstrating high user-sickness among our fans. Furthermore, we extended our game-specific membership service to multiple segments. Based on the characteristics of each game, we launched customized game membership services to meet users' needs for in-game items. Going forward, we will strengthen our cooperation with game developers delve deep into users' gaming needs and explore more commercialization channels. In terms of our product R&D and function innovation, we continue to deepen cooperation with game developers. In compliance with laws and regulations and based on our partial game-based sharing partnership with game developers, we integrated gaming data, content, and functions with those content and gameplay. making live streaming content close-fit with this game. For example, in Arnold King's live streaming channel, users can easily team up with streamers and other users to play the game through the Join with One Click function, making user-streamer interactions significantly simpler than before. In the past, users had to manually add friends into the game to form teams. In addition, we displayed more game-related data and gaming strategies through partial game data sharing in games such as Battle of the Golden Spatula and Peacekeeper Elite, further optimizing our user experience and stimulating live streaming engagement. Overall, in the challenging year of 2022, we created a healthy and vital gaming content ecosystem through various operational strategies, including adjusting revenue-generating activities and increasing investments in self-produced content, thereby maintaining stability in the company's overall business and financial performance. Going forward, we will continue to execute on our diversified, game-centric content strategy and focus on maintaining the scale and quality of our core users. By further improving game content and strengthening our connection with co-users, we will enhance user-sickness on our platform and elevate those values as a gaming content ecosystem. Meanwhile, we will continue to explore more commercialization channels and new growth avenues to maintain our leading position in the domestic game live streaming industry. 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. For the full year 2022, we focused on optimizing costs and developing revenue quality in order to improve financial performance. As we continue to invest in high-quality, self-produced content, and improve our revenue structure. We enhanced operating efficiency through adjusting our live streaming business together with effective cost and expense controls. For the four year 2022, our gross margin expanded to 13.9%. Adjusting net loss narrowed significantly to RMB 7.6 million. Let's now look at our financial performance for the fourth quarter in more detail. Total net revenues in the fourth quarter of 2022 decreased by 27.8% year-over-year to RMB 1.68 billion. Live streaming revenues were RMB 1.6 billion, a decrease of 27.7% from RMB 2.21 billion. in the same period of 2021. The decrease was mainly attributable to two factors, a continued implementation of prudent operating strategies and the one-off impact of a decline in streamers' activities following the end of COVID-19 restrictions. As a result, virtual gifting interactions were partially impelled, which caused a year-over-year decrease in quarterly up. Our quarterly up was RMB 293, down 4% from RMB 305 in the same period last year. Advertising and other revenues were RMB 84.3 million, compared with RMB 118.5 million in the same period of 2021. The year-over-year decrease was primarily attributable to the soft demand for brand advertising amid the challenging microeconomic environment. The decline was partially offset by the increase in other revenues contributed by game-specific membership services. Cost of revenues in the fourth quarter of 2022 was RMB 1.5 billion, a decrease of 28.2% compared with RMB 2.08 billion in the same period of 2021. Revenue share fees and content costs decreased by 31.2% to RMB 1.27 billion from RMB 1.85 billion in the same period of 2021. The decline was primarily driven by the following two factors. First, The decrease in revenue sharing fees was mainly in accordance with the decrease in live streaming revenues. In addition, the lower revenue sharing ratio, which was achieved through the implementation of our prudent operating strategies, led to a further reduction in revenue sharing fees. Second, the copyright costs decreased significantly as a result of a selective copyright procurement strategy, whereby we ceased acquiring overpriced content rights for esports tournaments. The decrease was partially offset by an increase in self-produced content costs driven by additional year-end events launched during the quarter. Benefit costs in the fourth quarter of 2022 decreased by 17.6% to RMB $138.4 million, from RMB 167.9 million in the same period of 2021. The decrease was mainly due to the year-over-year reduction in peak bandwidth usage in the absence of the purchase copyright of major esports tournaments. Gross profit in the fourth quarter of 2022 was RMB 186.1 million compared with RMB 244.7 million in the same period of 2021. Gross margin in the fourth quarter of 2022 was 11.1%, compared with 10.5% in the same period of 2021. This margin improvement was mainly driven by the decrease in both revenue sharing fees and copyright costs as a percentage of revenues. The improvement was partially diluted by the rising percentage of revenues attributed to self-produced content costs. Sales and marketing expenses in the fourth quarter of 2022 were RMB 123.9 million, a significant decrease of 45.9% from RMB 229.2 million. in the same period of 2021. This was mainly attributable to a decrease in both marketing expenses for user acquisition and branding expenses. Research and development expenses in the fourth quarter of 2022 were RMB 80.6 million, representing a 39.2% decrease from RMB 132.6 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 fourth quarter of 2022 were RMB 55.2 million, a drop of 44.1 million percent from RMB 98.8 million in the same period of 2021. The decrease was primarily due to decreased service compensation expenses as the vast majority of shares and our share incentive plans were fully vested as well as decreased professional service fees. Adjusted operating loss, which aspect service compensation expenses was RMB 56 million in the fourth quarter of 2022. compared with RMB 168.7 million in the same period of 2021. Net income in the fourth quarter of 2022 was RMB 41.8 million, compared with net loss of RMB 193.2 million in the same period of 2021. Adjusting net loss, which excludes service compensation expenses share of loss or income in equity method investments and impairment loss of investments was RMB 4.3 million in the fourth quarter of 2022, compared with RMB 150.7 million in the same period of 2021. For the fourth quarter of 2022, basic and diluted net income per ADS were RMB 0.14 and RMB 0.14, respectively, while adjusted basic diluted net loss, or ADS, were RMB 0.003 and RMB 0.003, respectively. As of December 31st, 2022, the company had cash and cash equivalents, restricted cash, and short-term and long-term bank deposits of RMB 6.81 billion, compared with RMB 6.64 billion as of December 31st, 2021. Moving forward, as part of our strategic focus on healthy long-term growth, our revenue may experience some immediate impact, which we believe is critical to our balanced growth. We will also strive to explore more commercialization channels and fine-tune our operations, supporting the sustainable long-term development of our platform while also delivering greater value for our shareholders. This concludes our prepared remarks for today. Operator, we are now ready to take questions.