DouYu International Holdings Limited

Good morning and good evening, ladies and gentlemen. Thank you and welcome to Do You International Holdings Limited's second quarter 2023 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. As a reminder, this call is being recorded. 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 second 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 second quarter 2023 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 state public provision for the 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. 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 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 selected environmental circumstances after the date of this conference call. I will now speak on behalf of our chairman, CEO, Mr. Xiaojie Chen. In the second quarter of 2023, the company's top priority was to foster a healthy ecosystem across our game century community. We stepped up the production of premium content to diversify our content matrix and enrich interactions across the community. We also heightened the importance of content management and strengthened the content review procedures on our platform. By ensuring the health of our ecosystem, we have solidified the foundation for our strategic long-term sustainable growth. On the operations side, we placed a heavy emphasis on improving the quality of our users. We actively refined our monetization and marketing strategies and deepened our cooperation with game developers with a focus on refining how we promote new games and their operations. The combination of these adjustments supports the overall stability of our business operations, healthy user metrics, and promote our improved profitability. In the second quarter, our mobile MAUs were 50.3 million, quarterly average paying users were four million, and our adjusted net income was RMB 61.4 million, surging 138% quarter over quarter. To begin with our user base, our mobile MAUs for the quarter declined 9.8% year over year. but were on par with the last quarter. The main reasons for the year-over-year change include, first, early this year, we refined our operating strategy to focus on improving user quality. This means that we have cut back on our low ROI marketing spend. As a result, our user acquisition expenses for the quarter significantly decreased year-over-year. The quality of our users has improved, however, The lack of user acquisition from promotional channels led to a year-over-year decline in quarterly MAUs. Second, we adhered to our content-driven approach to user growth. We attracted and retained users through continuous investment in high-quality content. We expect the regular updates we make to revenue-generating products and deeper cooperation with game developers to drive organic and better quality MAU growth over time. With our expanded entertainment content offerings, innovative membership services, and the launch and promotion of new games, we successfully attracted new users in the second quarter, which partially offset the year-over-year decrease in mobile MAUs, resulting from the adjustments we made in our marketing strategy. Moving to our content ecosystem. In the second quarter, we also continued to refine our diversified tournament system. We broadcasted over 20 large-scale official events and organized almost 60 self-produced esports tournaments. This included major worldwide official gaming events, such as the spring tournaments of LPL, King Pro League, and the Peacekeeper Elite League, as well as CSGO Blast Majors. As the peak season for mainstream esports spring tournaments came to an end in the second quarter, we offered an array of premium self-produced tournaments for the off-season, including the Douyu Honor of Kings National Challenge S7, which has now been held for seven consecutive seasons, the League of Legends Follower Contest led by StarStreamers, and the Peacekeeper Elite Mount Harunaka. With this rich and exciting off-season content offering, we have kept users actively engaged on our platform. In addition to tournaments, in the second quarter, we rolled out more interactive entertainment content by leveraging our top-tier streamer resources. For example, we worked with top LOL streamers on fan club activities, such as singing competitions featuring streamers and users. Building upon the profound influence of top tier streamers, a powerful effect was generated by fan club activities, which attracted many streamers and users. We also adopted the bullet chat format to enrich our event scoring system. This format's addition greatly elevated user participation and the frequency of user interactions. The fan club activities got incredible visibility across and beyond our platform. Its success gained traction among both new and existing users, further increasing overall user engagement. We continued to deepen our cooperation with game developers, particularly on the launch and promotion of new games. Justice Online, the launch at the end of June, is a major game that we're working on this year. We build momentum for it across our game segments and through multi-channel promotions, capitalizing on our outstanding streamer resources, rich game-related content such as game news and game guides. We were pleased to see a good deal of downloads and game activations. The month that follows a game's launch is considered the golden season for game promotion. As such, we use this time to work with game developers to promote our diversified live streaming content, community discussions and activities, generating traffic and engagement across our platform. We also did a second round of promotions of select live streaming content on multiple external channels, driving traffic beyond our platform. Additionally, we worked more closely with game developers on the development of customization tools, such as the game guide library and the character customization, building a comprehensive game segment that incorporate multiple content formats. Furthermore, while we were promoting the new AGC game, Honkai Star Rail, we were deeply involved in the game developer's large-scale offline activities, and we were the only live streaming platform invited to join the undertaking. Based on the game's product features, we tailored an area of game segment activities specifically for AJC users. Through online-offline interactions and audience benefits, we successfully attracted more users to our platform. In the second quarter of 2023, we optimized our content matrix while also enhancing our content management, review, and progress across the platform. First, we upgraded the review criteria, adding and refining over 30 items. Second, we applied innovative review technology, improving technical features such as content monitoring, filtering, and event trigger handling. Third, we strengthened our management system and staff training and elevated the awareness of content management and regulatory guidelines. we will further enhance the company's procedural and operational compliance programs to provide our users with better content and service offerings, improve user experience, and continuously optimize the healthy system of our game-centric community. Moving on to our monetization strategies, the number of quarterly average paying users in the second quarter was 4 million, with a quarterly approval of RMB 326. The reasons for the change in the number of paying users are threefold. First, as we executed our strategy of fostering a healthy, sustainable, game-centric community ecosystem, we reduced some of our revenue-generating activities to level up the platform, including canceling marketing activities aimed at attracting new paying users. Second, on the revenue side, we improved our operating efficiency by scaling down low gross margin operating activities. Third, the decrease in our overall user base was partially the result of reduced marketing spend. To some extent, this adjustment affected our users' willingness to pay, including both new users and price sensitive users, resulting in an overall decline in paying users. Nevertheless, we shifted our focus to upgrading our revenue-generating products and maintaining our co-paying users. Internal data show that in the second quarter, our co-paying users maintained stable spending habits, as reflected in our quarterly op-through, which shows both year-over-year and quarter-over-quarter. In terms of traditional virtual gifting, We launched our brand new user profiling system based on how much they spend. Any user that spends over a certain threshold is automatically entitled to exclusive user privileges, such as identity marks and exclusive services. These identity-based privileges are automatically granted each month, which improved our paying users' experience and fortified their stickiness. Apart from traditional virtual gifting, we continue to iterate and upgrade membership functions and benefits. Our membership business, which represents a sustainable source of revenue for us, is also on track towards steady growth. This added benefits to our members are a testament to how much we care about our co-paying users, as well as our sustainable relationships with them. Over the past quarters, we have developed a dual service system featuring platform-wide membership and game-specific membership. Based on our platform-wide membership service in the second quarter, we offered additional cost-sale membership benefits to users. Specifically, with each purchase of a platform-wide membership in certain game streamers' live streaming channels, users get certain in-game items and game-specific benefits for free. Owing to the complementary benefits of our dual membership system, our users became more actively engaged and willing to pay. We also rolled out innovative privilege gifts, such as gifts with sound effects customization, rewinding our revenue-generating products to elevate user interaction with streamers. and to maintain good vibes across our live streaming channels. In general, our membership renewal rate has been steadily on the rise for several consecutive quarters, demonstrating our consistent optimization of the co-paying users ecosystem. In terms of our product R&D and functionality innovation in the second quarter, we launched our own new big data system for stream analysis featuring real-time collection, statistics, and analysis of data on their live streaming content, hours, bullet chats, user traffic changes, et cetera. The system enabled our operations support team to provide timely measure of the streamer's performance against the various indicators so that we can better support our streamers with more precise feedback data. The system's built-in algorithms enable visualization of the streamer's live streaming data from multiple perspectives, providing data support for operational decision-making. With the system, our operation support team can directly capture high-quality content, of course, videos, images, and the bully chats from the streamer's live streaming channels, which helps us identify content that best appeals to audience for more effective recreation, enhancing the visibility of high-quality content. In conclusion, we remain committed to executing our core core strategy of fostering a vibrant game-centric content ecosystem. Our key objective is long-term sustainable growth. As we work to enhance our ecosystem, we remain focused on maintaining the scale and quality of our co-users, attracting more high-quality users to our diverse and growing content, fortifying user interaction and stickiness through innovative operations, and stimulating community-wide interactions. Looking forward, we will continue to explore more commercialization channels and new growth avenues, while maintaining our leading position in the domestic gaming content 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. In the second quarter, we continued to implement our refined growth strategy aimed at ensuring our healthy and balanced business outlook. Emphasizing the development of a healthy margin business and optimizing operations, we continue to adjust our revenue-generating activities and streamline operating efficiencies, including those that optimized content cost and further reduced marketing spending. As a result, despite some short-term impact to our revenue, we once again grew out adjusted net profit showing a solid increase quarter of quarter. Let's now look at our financial performance in more detail. Total net revenues in the second quarter of 2023 decreased by 24.1% year-over-year to RMB 1.39 billion. Live streaming revenues were RMB 1.26 billion. a decrease of 28.8% from RMB 1.77 billion in the same period of 2022. The decrease was mainly attributable to ongoing operational adjustments in our live streaming business to promote a healthy and sustainable ecosystem in a more cost-effective manner, as well as the challenging microenvironment These adjustments impacted spending from new PAN users and price-sensitive PAN users. Combined with a lower user base caused by our scaled-back promotions, we saw a year-over-year decrease in the total number of PAN users. Amid these changes, our core PAN users exhibited relatively stable PAN behavior, contributing to an 18.3% increase in up to RMB 326 in the second quarter, up from RMB 276 in the same period last year. Advertising and other revenues were RMB 133.9 million, an increase of 106.5% from RMB 64.9 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 second quarter of 2023 was RMB $1.2 billion, a decrease of 21.1% compared with RMB $1.52 billion in the same period of 2022. Revenue sharing fees and the content costs decreased by 25.4% to RMB, 0.98 billion from RMB, 1.31 billion in the same period of 2022. The decline was primarily driven by a decrease in revenue sharing fees, which were largely aligned with the decrease in live streaming revenues. The decrease was partially offset by an increase in copyright costs resulting from the purchase of LPL tournament copyright. Bandwidth costs in the second quarter of 2023 decreased by 17.3% to RMB 118.8 million from RMB 143.7 million in the same period of 2022. The decrease was mainly due to enhanced efficiency of peak bandwidth usage. Despite a year-over-year increase in peak bandwidth usage as a result of the rising tournament viewing demand, we managed to control bandwidth costs through dynamic bandwidth allocation strategies and other optimization measures. Cross-profit in the second quarter of 2023 was RMB $188.9 million, compared with RMB $309 million in the same period of 2022. The decrease in gross profit was mainly attributable to decreased net revenues and increased other costs. Other costs include the cost of game-specific membership services, which grew largely in line with the increase in other revenues. Gross margin in the second quarter of 2023 was 13.6%. compared with 16.9% 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 attributed to revenue sharing fees. Sales and marketing expenses in the second quarter of 2023 were RMB 87.1 million, a significant decrease of 48% from RMB, 167.5 million in the same period of 2022. This was mainly attributable to a decrease in marketing expenses for user acquisition. Research and development expenses in the second quarter of 2023 were RMB 71 million, representing a 30.2% decrease from RMB 101.9 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 second quarter of 2023 were RMB 46.9 million, a drop of 48.2% from RMB 90.7 million in the same period of 2022. The decrease was primarily due to decreased share-based compensation expenses as the shares and out-share incentive plans were fully vested. Loss from operations significantly narrowed to RMB 7.5 million in the second quarter of 2023 from RMB 30.6 million in the same period of 2022. Net income in the second quarter of 2003 was RMB 6.8 million, compared with a net loss of RMB 38.8 million in the same period of 2022. Adjusted net income, which excludes share-based compensation expenses, the share of loss or income in equity method investments, and impairment loss of investments was RMB 61.4 million in the second quarter of 2023, compared with RMB 23.5 million in the same period of 2022. For the second quarter of 2023, basic and diluted net income per ADS were both RMB 0.02, while adjusted basic and diluted net income per ADS were both RMB 0.19. As of June 30, 2023, the company had cash and cash equivalents, restricted cash, and short-term and long-term bank deposits of RMB 7.06 billion, compared with RMB 6.81 billion as of December 31, 2022. Going forward, we remain committed to stabilizing our core business operations while actively seeking opportunities to enhance our monetization capabilities and explore more commercialization channels. By improving revenue quality and maintaining a prudent cost management approach, we aim to support the long-term healthy development of our platform with sustainable profitability. This concludes our prepared remarks for today. Operator, we are now ready to take questions.