DouYu International Holdings Limited

Good morning and good evening, ladies and gentlemen. Thank you and welcome to Do You International Holdings Limited First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. We'll 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 Do You. Please go ahead, ma'am.

Thank you. Hello, everyone. Welcome to our fourth quarter 2023 earnings call. Joining us today are Mr. Xiaojie Chen, Chairman and Chief Executive Officer, Mr. Mingming Su, Chief Strategy Officer, and Mr. Hao Cao, Vice President of Finance. You can refer to our fourth quarter 2023 financial results on our IR website at ir.doi.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 the Safe Harbor Provision for Private Security Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks and certainties and other factors not under the company's control, which may cause actual results, performance, or achievements of the company to be materially different from the results, performance, or expectations implied by this forward-looking statement. All forward-looking statements are expressly qualified in their entirety by the cautionary statement, risk factors, and detail 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 2023, we plan to continue implementing our core goal strategy of building a comprehensive game-centric content ecosystem and to prioritize our focus on fostering a vibrant and healthy gaming community. In the fourth quarter, we made persistent efforts to produce premium gaming content and highlight our platform's gaming features by refining our operations and optimizing community interactions. These initiatives continue to lay a solid foundation for our long-term sustainable development. With that in mind, we proactively adjusted our revenue generation and marketing strategies with a sharp focus on enhancing our user quality and maintaining stable business performance. In the fourth quarter, our mobile MAUs were 50.2 million, with the total number of paying users at 4.5 million, and our adjusted net profit was RMB 25.8 million. To begin with, our average mobile IME use for the quarter was 50.2 million, a year-over-year decline of 8.9%, which was in line with our expectations. The main reasons for the changes include, first, in the fourth quarter, we shifted our operating strategy to focus on improving user quality, which significantly reduced our marketing expenses for user acquisition. On a year-over-year basis, the lack of user acquisition from promotional channels led to a notable decline in MAUs in the fourth quarter. We made this change in strategy because we discovered through data analysis that channel promotions resulted in low user retention and conversion, despite a short-term increase in user numbers. That is to say, as users' needs grow more diverse, Marketing alone is not a sustainable means of user acquisition. As such, we cut back on our low ROI marketing spending and strive to attract and retain users through continuous investments in high-quality content and cooperation with game developers, essentially advancing our growth with a content-driven approach. Second, our membership business, which we launched in collaboration with game developers contributed to user growth, partially offsetting the year-over-year decreasing in May use due to the adjustment we made in our marketing strategy. By upgrading and promoting our membership business based on game features, we met the gaming needs of more users, gaining traction among both new and existing users. Moving to our content ecosystem. Throughout our many years of operation, we have emphasized the development of our game-centric interactive content ecosystem. Our insistence on content-centered approach allows for continuous improvement in the quality of our content based on game features while providing innovative services and driving enhanced interactions in our community. Ultimately, this contributes to a healthy ecosystem with rich content and extensive interactions. In parallel with content optimization in the fourth quarter, we introduced new content display formats and interaction options to meet different users' needs across more diversified content consumption scenarios, which elevated overall user engagement and stickiness on our platform. In the fourth quarter, we continued to improve our diversified self-reduced tournament system and organized almost 90 eSports tournaments. This included collaborative events that have been held for several years in a row and are already integrated into the game's professional tournament system, such as the League of Legends Teamfight Tactics tournament on Doge's platform. We also produced tournaments based on our existing IP, with participation coming primarily from streamers. including the Peacekeeper Elite Mount Haruna Cup and the Goddess Cup for Naraka Blade Point and the CSGO, which were held for female streamers. In addition, we organized even more interactive and engaging mass tournaments, such as the Own of Kings Mecha Tournament and the Peacekeeper Elite Follower Contest, among others. By providing both professional and ledger events, our multi-layer tournament system not only met gamers' needs for watching diverse competitions, but also encouraged more users to take part in mass tournaments. In addition to producing tournaments for existing games, we also built new tournament content that caters to the features and user base of new games. For example, we unveiled the Valorant Overseas Tournament to build momentum for this new game segment along with the opening of the game for domestic preregistration, while offering streamers more opportunities for participation and exposure. This offers streamers with a wider growth path and provided a channel to professional esports teams to subsequently select professional player candidates. With respect to copyright deterrents, as copyright pricing gradually returning to a reasonable range, we purchased some co-tournament copyrights again this year, including the League of Legends Pro League and LOL World Championship tournament. These purchases were in consideration of the board influence of co-corporated tournaments and our rich experience in operating such content. In the fourth quarter, we broadcasted over 20 large-scale official events. such as the sprint tournaments of LPL, KPL, and the PELs, further elevating user engagement and stickiness in our game segments through differentiated derivative content and diverse operating activities. For example, in LPL, by leveraging our top tier streamer resources, we selected 12 streamers to do a co-streaming of the tournament's events, which achieved good results. The DAUs on our top streamer's live streaming channel were on par with that of the game's official channel. In addition, the number of bully chats exceeded those from the game's official channel by several times. In terms of community interaction, our goal is to augment the level of user engagement on our platform by exploring a broad variety of content formats. To that end, we consistently upgrade and roll out new bully chat formats, as bully chat has proven to be an important form of live streaming interaction. Specifically, we provided different colors, emoji pictures, and in-game roles for users to customize their bully comments, further complemented by identity tags that can be used as user names prefixes to diversify the interactive experience. Furthermore, we designed different bullet chat formats that varied according to users' membership levels and identity settings on our platform, thus offering users better interactive experience. Between live streaming sessions, our game-centric community became the primary hub for communication between streamers and users, and among users themselves. As such, we continue to explore different interactive formats within our community channel. For example, we observed that organizing team gaming activities through our community channel was an effective way to enhance user activity, addressing our users' gaming needs while highlighting our platform's game-oriented features. Moving on to our monetization strategies. Our total number of paying users in the fourth quarter was 4.5 million, with a quarterly uproar of RMB 314. The reasons for the change in the number of paying users are threefold. First, we continue to execute on the strategy we introduced in 2022 of increasing our operating efficiency, which included canceling marketing activities for new paying users with low rates of return. Second, beginning in the fourth quarter of 2023, we proactively reduced our low gross margin marketing activities by cutting back on the promotions of certain virtual gifts. Third, the decrease in our all user base was partially a result of reduced marketing spending. To some extent, these adjustments affected our users' willingness to pay, including both new users and price-sensitive users, resulting in an overall decline in paying users. Nevertheless, we devoted more operational resources to maintaining our co-paying users. Internal data show that in the fourth quarter, our co-paying users maintained stable spending habits. as reflected in our quarterly output, which rose both year over year and quarter over quarter. Apart from traditional virtual gifting, our membership business also represents a sustainable source of revenue, which is essential for maintaining co-users. Since 2022, we have consistently improved and promoted our platform-wide membership service with upgraded membership features and privileges to reinforce the companionship attribute of our product and amplify interactions between streamers and members. In the fourth quarter, we further optimized our paying user ecosystem through various member privileges and operational activities, facilitating a steady increase in members' renew rates for several consecutive quarters. On top of that, this year we plan to focus on expanding our game-specific membership services. We will design and promote customized game membership services tailored to each game to meet users' diversified needs for in-game items. Meanwhile, we will work closely with game developers to explore more commercialization channels based on gamers' habits and consumption characteristics. Overall, the development of our membership business has not only strengthened our user sickness, but also promoted our revenue diversification and sustainability, demonstrating the long-term value of Douyu's game-centric ecosystem. In terms of our product R&D and functionality innovation, as a gaming content platform, we continue to launch new content production tools. In the fourth quarter, we provided more convenient editing and display tools in our PC-based live streaming application for streamers, enabling them to quickly add gaming images, their personal images, words, and advertisements as live streaming inputs to improve live streaming quality and efficiency. Thanks to the user-friendly interface of this content aggregation tool, more long-tail streamers were able to employ them and enjoy an enhanced live streaming experience, which can help to improve their long-term retention rates. In conclusion, we remain committed to executing our core core strategy of fostering a vibrant game-centric content ecosystem with a focus on maintaining the scale and quality of our core users. We will strive to build a healthy platform by attracting more high-quality users to our diverse and growing content, and fortifying user interaction and stickiness through innovative operations. Looking forward, we will continue to explore more commercialization channels and new growth avenues while maintaining 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 Chao, to go through the details of our financial performance in the quarter.

Thank you, Lingling. Hello, everyone. In the first quarter, based on refined strategy to achieve healthy and balanced growth, we focused on the development of healthy margin business and operations. With our further adjustments to revenue-generating activities and reduced our marketing spendings, we generated an adjusted net profit for the quarter amid the short-term impact on revenues. Let's now look at our financial performance in more detail. Total net revenues in the first quarter of 2023 decreased by 17.4% year-over-year to RMB 1.48 billion. Live streaming revenues were RMB 1.37 billion, a decrease of 20.7%. from RMB 1.73 billion in the same period of 2022. The decrease was mainly attributable of continued operational adjustment on live streaming revenue, such as significantly reducing low margin promotional activities on virtual gifts. As a result, those adjustment impaled willingness to pay of new paying users and price-sensitive paying users, together with decreased user-based cost by reduced marketing spending, resulting in a year-over-year decrease in the number of paying users. However, the paying behavior of our core paying users remains relatively stable, leading to a year-over-year increase of 16.5% in quarterly up to RMB 314 in the first quarter, up from RMB 270 in the same period last year. Advertising and other revenues were RMB 114.1 million, an increase of 66.6% from RMB 68.4 million in the same period of 2022. The year-over-year increase was primarily attributable to the increase in other revenues contributed by game-specific membership services. Cost of revenues in the first quarter of 2023 was RMB 1.31 billion, a decrease of 15.8% compared with RMB 1.55 billion in the same period of 2022. revenue share fees and accounting costs decreased by 19.1% to RMB 1.08 billion from RMB 1.34 billion in the same period of 2022. The decline was primarily driven by the following two factors. First, the decrease in revenue share fees was mainly in accordance with the decrease in live streaming revenues In addition, the lower revenue sharing ratio, which was achieved through our continued operational efficiency improvement, led to a further reduction in revenue sharing fees. Second, content costs also decreased largely attributable to better managed self-produced content costs benefited from less operating activities with low margin. as well as controlled payments to streamers. The decrease was partially offset by increase in copyright costs as a result of the purchase of LPL tournament copyright. Bandwidth costs in the first quarter of 2023 decreased by 18% to RMB 124.5 million from RMB 151.9 million. in the same period of 2022. The decrease was mainly due to improved efficiency of peak bandwidth usage. Though the peak bandwidth usage increased year-over-year due to the growing tournament viewing demand, we managed to control bandwidth costs through dynamic bandwidth allocation and other optimization measures. Gross profit in the first quarter of 2023 was RMB 176.5 million, compared with RMB 243.8 million in the same period of 2022. The decrease in gross profit was mainly attributable to the decrease in net revenues and the increased other costs. Other costs include the cost of game-specific membership service which grew largely in line with the increase in other revenues. Gross margin in the first quarter of 2023 was 11.9%, compared with 13.6% in the same period of 2022. The decrease in gross margin was mainly attributable to the increase in other costs as a percentage of revenues, which was partially offset by the decreasing percentage of revenues attributable to revenue sharing fees and content costs. Sales and marketing expenses in the first quarter of 2023 were RMB 90.7 million, a significant decrease of 51.3% from RMB 186.4 million in the same period of 2022. This was mainly attributable to a decrease in both marketing expenses for user acquisition and branding expenses. Research and development expenses in the first quarter of 2023 were RMB 72.3 million, representing a 37.8% decrease from RMB 116.3 million in the same period of 2022. This decrease was primarily due to a decrease in personnel related expenses. General and administrative expenses in the first quarter of 2023 were RMB 59.8 million, a drop of 33.6% from RMB 90.1 million in the same period of 2022. The decrease was primarily due to decreased share based compensation expenses as the vast majority of shares and our share incentive plans were fully vested. Loss from operations was RMB 27.3 million in the first quarter of 2023, narrowed significantly from RMB 101.2 million in the same period of 2022. Net income in the first quarter of 2023 was RMB 14.5 million, compared with net loss of RMB 86.9 million in the same period of 2022. Adjusting net income, which excludes share-based compensation expenses, the share of loss or income in equity method investments, and the impairment loss of investments was RMB 25.8 million in the first quarter of 2023, compared with adjusted net loss of RMB 52.5 million in the same period of 2022. For the first quarter of 2023, basic undiluted net income per ADS were both RMB 0.05, while adjusted basic undiluted net income per ADS were both RMB 0.08. As of March 31, 2023, the company had cash and cash equivalents, restricted cash, and short-term and long-term bank deposits of RMB 6.6 billion, compared with RMB 6.81 billion as of December 31, 2022. Going forward, we will maintain the stable operation of our core business and further improve revenue quality while continuing to optimize costs and expenses in order to deliver sustainable profitability. We will also strive to explore more commercialization channels and enhance the monetization capabilities to support the long-term healthy development of our platform. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Lee Zhang from Bank of America. Please go ahead.

Good evening, Manager Chen. Thank you for accepting my question. I have two questions. The first question is that I want to know, based on our 50 million mobile users, the company has been emphasizing the quality of core users, so can you help us understand how to look at the core users of the current platform, and what measures we will take to maintain the development of the overall core users? The second question is that I want to know, because we also know that many new games will be released this year, Thank you for taking my question. Two questions here. Firstly, we know that the co-user group is the key to our platform. So can you help us to understand our co-user group and how we can retain and expand our co-user group? Second delay, we know that we have so many new games launching this year. So do you think this new game can drive our users and the streaming business? Thank you.

This is the first question. I will answer it. As I mentioned, our users are the most valuable resources on our platform. The core users are the platforms that have a long storage time, a long viewing time, and highly active users. Mr. Chen will take the first question.

Users constitute the most valuable resources on our platform. Co-users refer to users who have high level of engagement and activity with long viewing hours and high retention rate. They are basically game users who have played a key role in building the gaming community on our platform. They are also the foundation of our business development. As such, we have kept upgrading our content and product formats based on changes in users' needs. We have also taken various measures to maintain our co-users while acquiring new users through an enhanced platform ecosystem.

We focus on content quality and user experience, and then continue to optimize product functions and interfaces. For software, we value content quality and user experience.

That's why we have continuously optimized our product features and interface and strengthened our platform's game attributes to enforce our appeal to users. We have continued to invest in content upgrades, establishing a multi-layered gaming content system covering official tournaments, self-produced tournaments, and programs. Meanwhile, we met users' needs for long-term fragmented and interactive content through different content formats, such as live streaming, videos, and communities, respectively.

The second point is that, in terms of product form, we have optimized the usage habits of our users, as well as the access to the video and community. In different game zones, we will change the content of the game's features and users' preferences, such as the display, video, and content consumption of users. In the LOL, Cloud, and God zones, for example, we emphasize that the game's strategy and video content Second, regarding product formats, we optimize our video and community access based on users' habits. We also change the content display priority in different game segments. According to game characteristics and user preference,

to facilitate content consumption. Notably, in game segments such as LOL Teamfight Tactics and Jinjin Impact, video content such as game strategies has a higher viewership compared to traditional game segments. In the newly launched Egg Party segment, users can team up through our community channel, leading to stronger user engagement and appeal in this channel than in traditional game segments.

Thirdly, we strengthen the user operation and service by personalizing recommendations and innovative services to increase user experience and connectivity. For example, we are targeting special users who have a continuous consumption habit. Then we recommend the full-band member service system to these users and strengthen the interaction with these users. For the users of game players, we have launched game member services to meet their needs for game props. Third, we strengthened our user operations and services, enhancing our user experience and stickiness,

through personalized recommendations and innovative services. For example, for users with continuous consumption habits who follow our streamers, we recommend platform-wide membership to fortify their interactions with streamers. As for users who play games, we roll out game-specific membership services to meet their needs for in-game items. Therefore, based on the data we have accumulated over the years, our efforts have ensured our co-users' satisfaction and stickiness, thereby maintaining user loyalty in the long run. The stability of our co-users is not only the foundation of our gaming community, but also the starting point of our explorations for new growth models that can benefit the long-term healthy development of our platform.

Let me answer your second question about the new game. As the approval for new game titles resumed at the beginning of this year, casual games have been gaining popularity. The public testing, pre-launch promotions, and official launch of some large-scale games have given us more opportunities to attract users through higher-quality new game content and innovative platform operations. TK-AG Party as an example. As it's a casual game with strong social attributes, we enhanced our community channel operations, encouraging users to team up through our community channel to play games. Thus, reinforcing user interactions to attract more players. Another example is the Valorant FPS game to be launched soon for domestic market. As users typically enjoy watching such competitive games, we produce highly engaging tournament content to attract the attention of both streamers and users. Thanks to our high-quality streamer pool and self-produced tournaments, users' viewing time grew significantly in the VALORANT segment after the opening for domestic pre-registration. On top of providing streamers and content offerings, which is our common practice for new games, we also offer suitable gaming content and display formats based on game characteristics. In addition, we work with game game developers to acquire more new gamer benefits and promote the games in conjunction with our platform's game content. In this way, new games can attract more new users in the early stages of their launch. Among the games to be launched this year, we believe Honkai Stereo and Justice Online Mobile will be the focus of our operations. As HomeKit Stereo is not a great fit for livestreaming compared with competitive games, we leveraged its ACG attributes for content operations, such as inviting popular IOLs players who are also fans of Genshin Impact to showcase the new game through live streaming. We also launched a game Q&A challenge in our community channel to inspire user interactions. Although we cannot accurately predict the schedule for the game launch, we have already conducted detailed evaluations of the new games, and accordingly, we have made thorough plans for their operations. This is to ensure that we can quickly deploy and integrate resources upon the games launch and provide promotional and operational support. Thus, seeing the opportunity to acquire more users during the game's promotional season. Thank you. Please, next question.

The next question comes from Thomas Chong from Jefferies. Please, go ahead.

Thank you for the question. My question is, the company has made a lot of new strategy adjustments in the past two years. I would like to ask you, we should evaluate the effectiveness of our new strategy from several dimensions. I will transfer myself. Thanks, management, for taking my question. So my question is that, so in recent years, we have made some adjustments on operational strategies. So how should we measure or evaluate the effectiveness of new strategies? Thanks.

As China's core platform for gaming content, our first task is to focus on long-term sustainable development, while stabilizing and optimizing traditional business, and exploring new business growth. For traditional gaming live broadcast business, we focus on increasing user size and increasing user quality. Through high-quality platform content and upgrading product structure, strengthening interaction functions, etc., we will improve the community environment of gaming.

As we face a consistently evolving industry landscape and more diverse gaming consumption needs, we are prioritizing long-term sustainable development as a leading game-centric content platform in China. While stabilizing and optimizing our traditional business, We are also exploring new business growth opportunities. Speaking of our traditional game live streaming business, we are seeking to improve user quality while also pursue growth in user scale. By delivering high-quality content, upgrading our product structure, and strengthening our interactive features, we've been able to enrich our platform's game-centric community ecosystem and enhance our user experience and retention rate. I will elaborate on the strategic adjustments we made over the past years and still ongoing, along with discussing the effectiveness of our evaluation metrics.

First of all, there have been some changes in the strategy of market backers. Currently, the scale of the Chinese game user market is basically stable. In the face of the changes in the stock market and the demand of users, the return rate of users' investment and return from market promotion seems to be gradually decreasing. Therefore, we are adhering to the growth logic of content drive. Through quality content and some cooperation on the game market, we can get some new users. By constructing diversified products, we can meet the needs of diversified users to improve users' annuality. Gradually, the content of the platform is generated and some users develop the ecosystem. The most intuitive data for the ecosystem of the other platforms is the activity of the platform users, the flow of the market, and the data of storage.

First, I will discuss changes in our user acquisition strategy. At present, the scale of China's gaming market is essentially stable. Given users' evolving needs in the current market, the ROI of channel promotion has been declining. As such, we stick to a content-driven approach to growth by continuously investing in high-quality content and cooperating with game developers to acquire new users. We've also built a diverse product system to meet user different needs and enhance user sickness, gradually forming a positive cycle of content production and user growth. The most straightforward metrics for improvement in our ecosystem include user activity, time spent, and retention rate.

Many past events are mainly for high income. The purpose is to improve the payment ecosystem of the platform, to make the payment of users healthier, and to promote the long-term payment and health development of the platform. For the traditional live live-streaming business, we will further reduce the investment of opportunity return rate, such as some discount activities, and develop some revenue products that are more suitable for current consumption. In adjusting the income of live-streaming business, Second, on the revenue front, over the period of time, we've reduced our marketing activities that target revenue growth. The purpose is to improve our platform's consumption ecosystem

and make it easier and more likely for users to engage in paying behaviors in order to promote our platform's long-term health development. Regarding our traditional virtual gifting business, we further reduce low ROI investments during the fourth quarter, such as various promotions, and develop products more suitable for current consumption trends. While adjusting our virtual gifting revenue mix, We also optimize our cost and expense structures. As a result, with virtual gift teams still our major source of revenue, we focus on revenue stability and improvements in both gross margin and net adjusted net margin.

focus on the platform's game attribute, and carry out explorations that are conducive to continuing to meet the needs of game players. For example, based on the classification of platform users, we have targeted to launch the platform membership business of major companion products and the game membership service of major game consumption. The uniqueness and continuity of these revenue products not only contributes to the new users on the platform, but also contributes to the improvement of the company's income structure. Third, in terms of exploration of new monetization models, we explored value added services that

can consistently satisfy gamers' needs with a focus on platform's game attributes. For example, based on our user cohort, we launched our platform membership business with companionship-oriented products and a game membership services for gaming users. This unique and sustainable product can not only bring new users to our platform, but also improve our revenue structure. Although the current revenue contribution of membership services is relatively small, we believe it has a great potential and it has demonstrated the flexibility of our new models. On the whole, compared with revenue and expense adjustments, it will take time and patience for our content investments and new model exploration to pay off with improvements in our operations. Accordingly, with revenue scale, expansion under pressure in the short run, we will focus more on refined operations and cost and expenses controls to maintain our long-term profitability as we continue to make the adjustments mentioned earlier. Thank you. Next question, please.

Next question comes from Richie Sun from HSBC. Please go ahead.

Good evening. Thank you for accepting my question. I have two questions. The first question is about the recovery of the company's purchase of LPL rights this year. Can you share the return to the contribution to the platform? The second question is to ask the manager to share the trend of the company's size of users and the size of paid users this year. I will translate this myself. Thank you for taking my questions. I have two. So first of all, Phil, you actually have resumed the procurement of LPL. Can management share how does the return of this tournament contribute to the platform? Second of all, can management share our MAU as well as paying user trends for this year? Thank you.

Let me answer your first question about tournaments. We believe the copyrighted tournaments are still of great value, and as price levels gradually returned to a reasonable range, we repurchased some copyrighted tournaments in 2023, such as the LPL and the LOL World Championship tournaments. While LPL's return brought us some incremental growth in traffic in the IOL segment, but it couldn't offset the decline in user skill resulting from significantly reduced promotional expenses. These developments were all within our expectations. It is worth mentioning that the tournament's return elevated overall user activity in the IOL segment. There have been clear quote-over-quote improvements in average daily viewing hours and the number of bullet chats per user. In particular, as mentioned in our CEO's remarks, this year we leveraged our top tier streamers and official tournament commentaries for a co-streaming of the tournament events. The topics covered in these live streaming sessions attracted widespread attention and inspired discussions on and off our website. This demonstrated once again our enduring influence as an established game live streaming platform even if we stopped live streaming some copyrighted tournaments for a year.

I will answer the second question about the user and paying user training. Our operating strategy prioritizes long-term sustainable development, that is, exploring growth from new businesses while stabilizing and optimizing our traditional businesses. As our traditional businesses account for a large share of our total revenue, adjustments in these businesses will impact operational and financial performance of the whole platform. The most direct adjustments this year lie in our marketing strategy of user acquisition and live streaming activities. These adjustments affected a platform's user scale and our number of paying users, which explained the year-over-year and quarter-over-quarter decline in MAUs and paying users in the first quarter. A significant reduction of channel promotional expenses was the main reason for the decline in MAUs. Our MAU performance in the first quarter was in line with our expectations. Namely, most of the lost MAUs were short-term users from the platform. So this strategy won't affect our content operations or our monetization efficiency. In comparison, our core user base has remained relatively stable For instance, users with above average viewing hours have a retention rate that almost doubles the average retention rate, and paying users next month's retention rate exceeds the average retention rate by over 50%. We will continue to execute our strategy of reducing China promotional expenses. On that basis, we expect MAUs in 2023 to remain on the same level as in the first quarter, with small quarterly fluctuations. The decline in paying users is attributable to two factors. One is that our adjustments in revenue-generating activities affected some users' willingness to pay. The other is that the overall decrease in our user scale. Guided by the operating principle of improving user quality we will devote more operational and other resources to maintaining a core paying user's stickiness and willingness to pay through more interactive products and innovative membership services. So far, our paying user base has reached a relatively stable range. We believe our operational adjustment will allow us to concentrate our resource on content which is more sustainable despite a longer payoff cycle. It will take time before we can see the results of these adjustments. Meanwhile, we have been following the progress and will provide updates in due course. Thank you. Next question.

The next question comes from Raphael Chen from Bank of China International. Please go ahead.

Thanks, management, for taking my question. I only have one question regarding the bottom line. Could management system color on the bottom line or margin outlook in the next three quarters? Thank you.

Starting last year, as we kept adjusting the live streaming business to drive its healthy growth, our overall operational efficiency has improved through fine-tuned operations and increasing ROI. We have achieved good results, with our net loss has gradually narrowed. In the first quarter, by continuing to adjust and reduce our low margin operations, we achieved net profitability under both non-GAAP and GAAP, echoing our goal of maintaining prudent operations in traditional business in 2023. Working towards this goal, we remained committed to executing our strategy of fostering a comprehensive GAAP-centric content platform. We increased the investment in quality tournament content, adding the copyrighted LPL tournaments this year. and continuing to invest in KPL tournaments and other top-notch copyrights. Furthermore, we also actively promoted innovative businesses, such as game-specific membership services. To address the increased costs of copyrights and innovative business, we adopted a flexible approach to control overall costs through content management and strategic operations. Regarding revenue sharing fees, as we actively fostered a healthy and sustainable live streaming ecosystem and reduced low margin operational activities, the overall revenue sharing ratio remained at current low level. In terms of content costs, we strengthened content management and operations. On the one hand, we elevated the production efficiency of self-produced content for ROI improvements. On the other hand, we reduced low-margin promotional activities. As a result, the cost of self-produced content and operational activities have been notably reduced year over year. On the whole, we expect the overall cost of revenues in 2023 as a percentage of revenues to remain flat year over year. In terms of operating expenses, we adhered to a content-driven approach to user growth, vastly cutting out channel-related user acquisition expenses. We expect a major reduction in four-year marketing expenses year-over-year. Meanwhile, we will actively optimize operating expenses and further refine our employee streamlining to improve operational efficiency. Cost control measures certainly helped us strengthen our traditional live streaming business. Leveraging on the competitive edge of traffic and gaming content we built from our traditional live streaming business, we put more efforts on exploring and developing innovative growth avenues, which in turn supported our platform's long-term sustainable profitability and development. Thank you.

Thank you. That's all the time we have for questions. I will now turn the call back over to management for closing remarks.

On behalf of the management, thank you for joining our call. We look forward to speaking with everyone of you next quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.