DouYu International Holdings Limited

Good morning and good evening, ladies and gentlemen. Thank you, and welcome to DOEU International Holdings Limited Third 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. I will now turn the call over to the first speaker today, Ms. Ling-Ling Kong, IR Director at DOEU. Please go ahead, ma'am.

Thank you. Hello, everyone. Welcome to our third quarter 2023 earnings call. Joining us today are Mr. Mingming Su, Chief Strategy Officer, and Mr. Hao Cao, Vice President of Finance from Interim Management Committee. You can refer to our third 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 safe harbor provision for the Private Security Litigation Reform Act of 1995. These forward-looking statements are based on management county expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the company's control. which may cause actual results, performance, or achievements of the company to be materially different from the results, performance, or expectations implied by this forward-looking statement. All forward-looking statements expressly qualified in their entirety by the cautionary statement, risk factors, and details of the company's filing with the CDC. 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. Before I provide an update on our business performance for the third quarter of 2023, on behalf of management, I would like to briefly address the current recent situation concerning Mr. Xiaojie Chen. As announced, Douyu has formed an interim management committee to manage the company's operations until further notice. I will now speak on behalf of our interim management committee on business updates, and the call will be handed to our Vice President of Finance, Mr. Hao Tao, for financial discussion. In the third quarter of 2023, We diligently executed and optimized our corporate growth strategy, steadily advancing our business. For the quarter, our mobile MAUs were 51.7 million, quarterly average paying users were 3.9 million, and our adjusted net profit was RMB 71.9 million. During the summer peak season, the third quarter was marked by a rising official gaming event derivative self-produced content, and promotions for new game launches. This provided meaningful catalysts for more momentum in attracting new users and invigorating existing ones. We elevated user engagement and user intention through our premium content offerings and product features. Secondly, we continue to deepen our cooperation with game developers. scaling up promotions for new games, and consistently introduce a variety of program operations. In addition, we continue to conduct internal supervision as normal with our commitment to fostering a compliant, harmonious, and healthy life-dreaming environment. With this continuous optimization to our ecosystem that houses our game-centric community, Our overall profitability has improved. Let's take a closer look at our business operations during the third quarter. In the third quarter, our mobile MAUs were 51.7 million, slightly up quarter over quarter despite a decrease of 9.5% year over year, which was mainly attributable to the fine-tuning of our user acquisition strategy. Starting in early 2023, we began emphasizing user quality and cutback on low ROI marketing spending, greatly reducing customer acquisition expenses. On a year-over-year basis, this led to a lack of user acquisition from promotional channels and a decline in MAUs. Quarter over quarter, on the other hand, our MAUs increased, which we attribute to two primary factors. First, We broadcasted multiple mainstream esports summer tournaments and co-streamed the tournament events, fully capitalizing on the seasonality of the peak summer season. Second, our premium content and programs, a pair of initiatives for revenue generating products, and promotions for the launch of new games all contributed to an influx of new users and re-engagement with our existing users. we have long adhered to a content-driven approach to user growth, consistently attracting and retaining high-quality users by delivering top-tier content, with a particular spotlight on esports. Moving to our content ecosystem. This quarter, we continue to enhance our diversified tournament system, broadcasting over 50 large-scale official gaming events, including the League of Legends Pro League Summer Split, King Pro League, Dota 2 Bali Major, and READ Masters, as well as the Valorant Champions. We roll out an array of derivative programs and activities for the official gaming events, including the co-streamed live commentary featuring star streamers, as well as post-game review programs. Thanks to this derivative and their diverse discussion topics, we got to further engage some users initially drawn to the official gaming event, giving an extra boost to user activity. During the quarter, we produced nearly 80 esports tournaments. During the downtime between official gaming events, we strategically launched high-engagement, self-produced tournaments that garnered enthusiastic response. This included pre-match activities for the official LPL Commentator and Host Championship, the Douyu Honor Cup S6, the Douyu Crossfire Legend Cup, and the Naraka Blink Coin Koi Cup, keeping users actively engaged in our game segments with best-in-class off-scene offerings. Capitalizing on the prime opportunities represented by the summer peak season, we took our cooperation with game developers to the next level, achieving favorable outcomes in both the operation of games that we already covered and the promotion of new ones. Aggie Party has been a standout success this year. In partnership with its developer, we launched Aggie Go, a premier PGC variety show featuring Aggie Party. From the initial video auditions to the latter mentor-led group competitions, all the way to the final round of in-person funnels, we played an instrumental role in seamlessly integrating entertainment elements into the gaming experience, showcasing both the highly interactive nature and the core allure of Aggie Party. In the meantime, along the program, we initiated a theory of community operations and incentives for streamers in the Aggie Party segment, successfully gaining traction among both new and existing users and fortifying overall users' dignity. This type of highly popular, high-quality content facilitates course promotion and synergy between our platform and gamers. increasing user penetration on both fronts, and ultimately benefiting all stakeholders. In the third quarter, our focus for new game promotions centered on Valorant, and the appeal of this competitive and highly entertaining game was maximized through engaging live streaming. Driven by a combination of official gaming events and self-produced tournaments, Valorant has since its launch consistently secured a spot on DOE's top 20 games list. Additionally, for the promotion of new game Lost Ark, we invited special guests and platform streamers to conduct exclusive live broadcasts on the public release day, gathering widespread attention both within and outside the platform. Our sophisticated content operations not only boosted the visibility and the preeminence of the new game itself, but also importantly underscored those ability to consistently deliver premium content, leaving a lasting impression on gamers. Let's turn to our monetization strategies. Our total number of paying users in the third quarter was 3.9 million. The year-over-year change in the number of paying users is mainly due to two reasons. First, as we executed our strategy to foster a healthy, sustainable, game-centric community ecosystem, we reduced the sum of our revenue generating actions intended to boost activity on the platform, including discontinuing marketing activities aimed at attracting new paying users. Second, on the revenue side, we improved our operating efficiency by scaling down low-margin marketing activities. The challenging macro landscape has, to a certain extent, made users less willing to spend, resulting in a reduction in the number of paying users. As we continue to maintain our co-paying users, given the existing market situation, we offer some modestly-priced revenue-generating products to accommodate the spending habits of mid and long tail users. Therefore, our quarterly approval marginally declined year over year and quarter over quarter to RMB 306. Apart from revenue generated from traditional virtual gifting, our membership business also achieved solid growth momentum. While continuously upgrading membership functions and benefits, We advanced our membership system with a rich collection of activities and kept our coping user base stable. For example, based on our members' long-term spending habits, in addition to the existing special reminder for member anniversaries, we introduced anniversary celebration features, such as the moments in time photo albums to any members who's been with Douyu for one year or more. representing the members' memorable moments spent with streamers, positively strengthening the connection between streamers and users. In general, we have effectively attended to and retained co-paying users across the platform, and our membership renewal rate has steadily increased over several consecutive quarters. Regarding product R&D and functionality innovation, In the third quarter, we have been continuously refining our healthy content ecosystem and improving the operating efficiency of relevant business segments empowered by technology upgrades. Firstly, on content review and approval, we fortified our tech-based content monitoring and identification, increasing the accuracy of system reviews while expanding the scope of these reviews. This enhancement effectively eased the burden of manual review and resulted in an overall improvement in the efficiency of our content moderation. Secondly, our content search function has been greatly enhanced. As we add more game categories and new games to our lineup, the streamers in our game segments have been become increasingly inclined to cover more than just one specific game during live streaming. Our in-house team harnessed deep learning technology and developed a search solution for game segments, which quickly proves live streaming channels covering the same gaming content into the relevant game segment. The solution has elevated content visibility made it easier for users to find their desired content. The solution did the desired content and improved overall content utilization efficiency. Crucially, accurate identification of content covered by each live streaming channel formed the foundation of sufficient content recommendation and distribution, which in turn empowers us to provide users with more precise personalized recommendations. In conclusion, we believe that we remain firmly committed to fostering a vibrant, diverse, game-centric content ecosystem with a steadfast focus on long-term sustainable growth while upholding regulatory compliance. Recently, it has come to the knowledge of the company that there have been investigations with regard to historical activities of certain streamers on the company's platform. Till now, the company's operations remain normal and the investigations have not had any material adverse impact on the company's operations. We will monitor the situation closely and provide timely disclosures as necessary. We would like to emphasize that our platform is formally committed to legal compliance and we will take necessary measures against any illegal activity which is in violation of the rules and policies of our platform. As we have observed the presence of misinformation circulating online, we would strongly recommend that all stakeholders remain informed by following the press release issued by the company for accurate information regarding this investigation and the company's related actions. We will continue to make every effort to build a healthy, diversified, game-centric ecosystem for our users and streamers. 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, against the challenging macroeconomic environment, we maintained a stable financial performance by executing efficient operational strategies, such as adopting a flexible pricing mechanism for revenue-generating products, and further optimizing content costs. Together with our ongoing effective cost control measures, our adjusted net profit has achieved stable growth for the third consecutive quarter. Now, let's take a look at our financial performance in more detail. Total net revenues in the third quarter of 2023 decreased by 24.4% year-over-year to RMB 1.36 billion. Live streaming revenues were RMB 1.15 billion, a decrease of 32.5% from RMB 1.71 billion in the same period of 2022. The decrease was primarily due to the soft macroeconomic condition, which impacted the spending willingness of some new and price-sensitive paying users. Coupled with a smaller user base, resulting from our strategically decreased marketing spending, the number of total paying users decreased year-over-year. In response to the soft consumer sentiment, we provided lower-priced revenue products to sustain the spending habits among mid- to long-tail paying users, which resulted in a decrease in quarterly up. Our quarterly up was RMB 306, down 4% from RMB 319 in the same period last year. Advertising and other revenues were RMB 208.2 million, an increase of 123.2% from RMB 93.3 million in the same period of 2022. The year-over-year increase was primarily driven by the increase in other revenues generated through other innovative businesses. Cost of revenues in the third quarter of 2023 was RMB 1.17 billion, a decrease of 24.6% compared with RMB 1.55 billion in the same period of 2022. revenue sharing fees and accounting costs decreased by 29.7% to RMB 0.93 billion from RMB 1.32 billion in the same period of 2022. The decrease was mainly driven by two factors. First, the decrease in revenue sharing fees, which was mainly aligned with decreased live streaming revenues. Second, a decrease in content costs, which was primarily attributable to improved cost management in our self-produced content and streamer payments. However, this decrease was partially offset by higher copyright costs due to the acquisition of LPL tournament rights. Language costs in the third quarter of 2023 decreased by 21.4% to RMB $106.1 million from RMB $135 million in the same period of 2022. The decline was primarily due to our effective bandwidth cost control measures. Cross-profit in the third quarter of 2023 was RMB $192.4 million, compared with RMB $214 million. 51.2 million in the same period of 2022. The decline in gross profit was primarily attributable to decreased live streaming revenues and increased other costs. The increase in other costs was largely in line with the increase in other revenues. Gross margin in the third quarter of 2023 was 14.2%. compared with 14% in the same period of 2022. Sales and marketing expenses in the third quarter of 2023 were RMB 90 million, a significant decrease of 44.5% from RMB 162.1 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 third quarter of 2023 were RMB 74.5 million, representing an 11.7% decrease from RMB 84.4 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 third quarter of 2023 were RMB 51 million, a drop of 2.5% from RMB 52.3 million in the same period of 2022. Loss from operations narrowed to RMB 8.8 million in the third quarter of 2023. from RMB 11.1 million in the same period of 2022. Net income in the third quarter of 2023 was RMB 76.4 million, compared with a net loss of RMB 6.6 million in the same period of 2022. Adjusting net income, which excludes share-based compensation expenses, the share of income are lost in equity method investments Gain and disposal of investment and impairment loss of investments was RMB 71.9 million in the third quarter of 2023, compared with RMB 25.7 million in the same period of 2022. For the third quarter of 2023, basic and diluted net income per ADS were both RMB 0.24 million while adjusted basic and diluted net income per ADS were both RMB 0.22. As of September 30, 2023, the company had cash and cash equivalents, restricted cash, and short-term and long-term bank deposits of RMB 7.14 billion, compared with RMB 6.81 billion as of December 31, 2022. Going forward, we are committed to supporting the sustainable growth of our platform. As we face short-term macro challenges, our goal is to improve the efficiency of our core business while actively exploring new business opportunities to enhance our revenue generation capabilities. We will continue to manage our costs and expenses with prudence to further increase our earnings. This multi-faceted strategy will help stabilize our financial profile and fortify our platform's long-term profitability, ensuring that we not only weather macro headwinds but also strive in the evolving gaming content industry landscape. This concludes our prepared remarks for today. Operator, we are now ready to take questions.