DouYu International Holdings Limited (NASDAQ:DOYU) Q3 2022 Earnings Call Transcript

DouYu International Holdings Limited (NASDAQ:DOYU) Q3 2022 Earnings Call Transcript November 21, 2022

DouYu International Holdings Limited misses on earnings expectations. Reported EPS is $0.09 EPS, expectations were $0.13.

Operator: Good morning and good evening ladies and gentlemen. Thank you and welcome to DouYu International Holdings Limited Third Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. Please note today’s event is being recorded. I will now turn the call over to the first speaker today, Ms. Lingling Kong, IR Director at DouYu. Please go ahead, ma’am.

Lingling Kong: Thank you. Hello, everyone. Welcome to our third quarter 2022 earnings call. Joining us today are Mr. Shaojie Chen, Chairman and Chief Executive Officer; Mr. Mingming Su, Chief Strategy Officer; and Mr. Hao Cao, Vice President of Finance. You can refer to our third quarter 2022 financial results on our IR website at ir.douyu.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 the Private Securities 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 these forward-looking statements.

All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors, and details of the company’s filings with the SEC. The company undertakes no duty to revise or update any forward-looking statements for selected events or circumstances after the date of this conference call. I will now speak on behalf of our Chairman and CEO, Mr. Shaojie Chen.

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Shaojie Chen: During the second quarter, we continued to innovate game content and optimize our operational model. We both retain our current user base and attracting new users by developing high quality content, while optimizing each game segment’s rate of return by enhancing existing value-added services and launching new ones. We achieved a second consecutive quarter of profitability on an adjusted basis as we stabilize our revenues improving revenue quality, while augmenting our cost controls and optimizing expenses. This quarter, MAUs numbered 57.1 million and total revenues were RMB1.8 billion. Our quarterly paying user count was 5.6 million and adjusted net profit reached RMB25.7 million. This quarter, our average mobile MAUs were 57.1 million, a decline of 7.7% year-over-year but a 2.5% increase quarter-over-quarter.

Our steady growth in MAUs for two consecutive quarters demonstrate that the negative impact of our selective corporate procurement strategy has been absorbed. Looking back on third quarter, the changes in MAUs was driven by two factors. First, the execution of our selective copyright procurement strategy led to a year-over-year traffic loss from users who primarily viewed eSports tournaments on our platform. This led to a decline in MAUs beginning in the fourth quarter of this year. However, we were able to stabilize traffic by increasing our investment in self-produced content and the combination of high quality tournament-related content and streamer content on our platform has helped us retain existing users and attract new ones. For instance, the launch in September of our top streamer tournament in the League of Legends gaming segment was a showcase event for our users, and demonstrated the potential of investing in self-produced content.

Second, we continue to innovate our membership services emphasizing their value as an avenue for exploring monetization opportunities outside of virtual gifting. Together with a series of promotional activities, these initiatives partially offset the negative impact of the MAU decline caused by our shift in content procurement policies. We have been upgrading our platform-wide membership service and this past quarter introduced game specific memberships as well. By integrating game features and gamers’ needs into a viable service package, our membership services attract new traffic and motivated inactive users to revisit our platform. Turning to our content updates. In the third quarter, saw us further augment our line of content offerings, including integrated live streaming, video, graphic content, and community discussions.

We brought together popular streamers, game developers, and distributors to organize custom, tournament, and shows based on the unique features of individual games. This content offered opportunities for enhanced interaction between users and streamers and we see this and other initiatives as part of our long-term growth strategy to create a comprehensive game centric content ecosystem. We endeavor to create a vibrant and healthy gaming community for our users by consistently providing high quality content and innovative product offerings. Based on huge user base of games and eSports, as well as their diverse content needs, we further enriched our content offerings and produced almost 90 eSports tournaments this quarter. During in organizing professional tournaments, we integrated features typical of pro events into our , leveraging our and inviting official commentators to host the events.

We provided our users with a genuine featuring games, including Honor of Kings and CS:GO. As the engagement of in the gaming community increases, we also produced a series of tournaments exclusive to female users. This tournaments features the games CS:GO, CrossFire-Naraka and the Bladepoint. And combined with our streamer recruitment and training system provided our female users with increased exposure and opportunities. Overall, these tournaments both expanded our user base and increased engagement levels in the respective game segments. We also put in the effort to add entertainment value to our professional competitive gaming content, making it more accessible to a wider audience. For instance, we held tournaments in the LoL gaming segment in partnership with top streamers.

Serving as team anchors, these top streamers invited professional eSports players and other skilled gamers to team up and compete in live streaming sessions, which garnered well spread acclaim and attention. This type of content featuring programmers in entertainment oriented gameplay enhances community resonance and engagement in its gaming segments, attracting new users and re-engaging in-active users. Let’s now turn to copyrighted content. During our years of retail experience in live streaming official tournaments, we launched diversified promotional activities across a variety of content formats. This format include live streaming, videos, and graphics related to official game and tournament IP content. At the same time, we export new models for cooperating with game developers so as to enhance tournament user stickiness and user engagement.

For instance, during the KPL summer tournament, we collaborated with Honor of Kings game developers to provide membership services exclusively for KPL tournament viewers leveraging the partial game data sharing partnership we established in the previous quarter. Incorporating the of KPL, this service was well received and contributed to new user growth. In addition to this innovation, we continue to improve for copywriting content. Thanks to our initiative to manage operating costs such as by utilizing game developers resources and conducting joint operations. Now, turning to monetization. Our total paying user count in the third quarter was 5.6 million with an average quarterly ARPU of RMB319 as we maintained our efforts to promote rational consumption we dynamically modified and fine-tuned our platform’s teaching functions and operations, including canceling low ROI promotional activities for new paying users.

As a result of these changes, our paying user count declined. However, our overall revenue remained stable on a quarterly basis, demonstrating the high stickiness of our co-paying users with more rational and sustainable spending behaviors. More importantly, starting in the second quarter, we made structural adjustments to improve our revenue quality. We enhanced the quality of virtual gifting revenue and made progress in improving our non-virtual gifting revenue. First, we have been updating our platform wide membership services since its major upgrade at the beginning of this year. During the quarter, we upgraded our member privilege system where members are entitled to actual benefits upon the completion of certain activities on the platform and can enjoy their membership and rewards with display in streamers like streaming channels.

The service further enhances the interactive experience between streamers and platform members. We have seen encouraging improvements in our membership fee renewal rate with the high user stickiness of our loyal fans demonstrating the value-added by the service. At the same time, we further explored the potential of new monetization models and achieved meaningful progress in the development of collaborations with game developers. During the quarter, we began launching our innovative game specific membership service. Users who purchase game specific memberships on our platform receive basis points and then they can earn by completing assigned tasks on our platform. Users can exchange a cumulative point for in game items or rewards provided by our platform in select live streaming channels.

This promotional activities, which are based on games unique features for few gamers’ demand, while enhancing user stickiness to our platform reflecting the value of DouYu and the game centric ecosystem platform. Going forward, we will continue to further explore the needs of users based on different game features and closely collaborate with game developers to discover and expand commercialization models and opportunities. In terms of product innovation and development, we continued to improve our users’ viewing experience and foster a game centric community. During the quarter, we collaborated with Tencent Cloud to create a stadium where users can watch eSports tournaments. Upon entering the VR Stadium through our platform tournament live streaming channel, users can enjoy a wider of interactive features, including viewing games in regular and VR modes, the ability to cheer for and support the participating team, and special effect gifting.

We implemented this feature during the livestream of CS:GO EPL and users showed great enthusiasm in participating. We will continue to refine up and upgrade our virtual game viewing experience, further enhancing our users’ live streaming experience, and creating new and unique forms of engagement within our user community. Overall, we continue to execute our sustainable development strategy by investing in self-produced content, and further innovating our operations. We also remained our deep collaborations with game developers and our commitment to build a healthy and engaging game centric ecosystem supported by interactive content offerings. The combination of these efforts will ensure the stable development of our traditional business. At the same time, we remain committed to improving our financial performance by actively exploring new monetization models to improve our revenue structure, while maintaining the stability of our current revenue stream.

We will continue to improve our overall operating efficiency through cost controls and expense optimization realizing our platform’s potential for long-term sustainable growth. With that, I will now turn the call over to our Vice President of Finance, Mr. Hao Cao to go through the details of our financial performance in the quarter.

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Hao Cao: Thank you, Lingling. Hello, everyone. In the third quarter, we maintained the stable financial performance of our core live streaming business, while continuing to execute effective cost and expense controls. As a result, we generated an adjusted net profit for the second consecutive quarter. On top of this, we have been investing in new forms of premium content and exploring new monetization channels. We believe that our healthy financial status will enable us to write-out a changing market environment with more flexibility in our operations. Let’s now look at our financial performance in more detail. Total net revenues in the third quarter of 2022 decreased by 23.4% year-over-year to RMB1.8 billion. Live streaming revenues were RMB1.71 billion, a decrease of 22.9% from RMB2.21 billion in the same period of 2021.

The decrease was due to the continued implementation of prudent operating strategies such as adjustments to certain interactive features and related efforts prioritizing the healthy long-term development of our platform. As we seek a more balanced revenue structure, we focus on maintaining our core paying user base. In doing so, we intentionally canceled some promotional campaigns for new paying users starting this quarter as this provided a low ROI. As a result of the decreased number of paying users, our quarterly ARPU was RMB319, a 3.9% increase from RMB307 in the same period last year. Advertising and other revenues were RMB93.3 million, compared with RMB137.5 million in the same period of 2021. The year-over-year decrease was primarily attributable to the continued exploration of new commercialization models, which use a portion of advertising traffic that could otherwise have been directly monetized, as well as the soft demand for brand advertising under the weak macro economy.

The decrease was partially offset by the increase in other revenues contributed by game specific membership services. Cost of revenues in the third quarter of 2022 was RMB1.55 billion, a decrease of 25.2% compared with RMB2.07 billion in the same period of 2021. Revenue sharing fees and content costs decreased 28.3% to RMB1.32 billion from RMB1.84 billion in the same period of 2021, which was driven by two factors. First, the decrease in revenue sharing fees outpaced the decrease in live streaming revenues as a result of lower revenue share ratio. This demonstrated our ongoing improvements to efficiency as we continue to execute our prudent operating strategies. Second, copyright costs decreased significantly as a result of our selective copyright procurement strategy well by acquiring overpriced copyrighted content for eSports tournaments.

Bandwidth costs in the third quarter of 2022 decreased by 17.4% to RMB135 million from RMB163.4 million in the same period of 2021. The decrease was mainly due to higher bandwidth efficiency achieved through dynamic bandwidth allocation. Meanwhile, the year-over-year reduction in peak bandwidth usage also contributed to the decrease in bandwidth costs. Gross profit in the third quarter of 2022 was RMB251.2 million, compared with RMB278.5 million in the same period of 2021. Gross margin for the quarter expanded to 14% from 11.9% in the third quarter of 2021, primarily due to two factors. The first was the significant decrease in the copyright costs as a percentage of revenues as we ceased acquiring overpriced copyrighted content for eSports tournaments.

The second was lower revenue sharing ratio, which benefited from the improvement in revenue quality and our sustainable operating strategy. Sales and marketing expenses in the third quarter of 2022 were RMB162.1 million, a significant decrease of 25.9% from RMB218.9 million in the same period of 2021. This was mainly attributable to the decreases in both marketing expenses for user acquisition and branding expenses. Research and development expenses in the third quarter of 2022 were RMB84.4 million, representing a 31.5% decrease from RMB123.2 million in the same period of 2021. This decrease was primarily due to a decrease in personnel-related expenses. General and administrative expenses in the third quarter of 2022 were RMB52.3 million dropping by 39.5% from RMB86.5 million in the same period of 2021.

The decreased was primarily due to decreased share-based compensation expenses as well as majority of shares and our share incentive plans were fully vested, as well as decreased professional service fees. Adjusted operating loss in the third quarter of 2022, which adds back share-based compensation expenses, was RMB8.4 million, compared with adjusted loss from operations of RMB91 million in the same period of 2021. Net loss in the third quarter of 2022 was RMB6.6 million, compared with RMB143.5 million in the same period of 2021. The improved gross margin and expense controls combined have led to three consecutive quarters of narrowing losses. Adjusted net income in the third quarter of 2022, which excludes share-based compensation expenses, share loss in equity method investments, and impairment loss of investments was RMB25.7 million, compared with adjusted net loss of RMB72.7 million in the same period of 2021.

For third quarter of 2022, basic and diluted net loss per ADS were RMB0.01 and RMB0.01 respectively, while adjusted basic and diluted net income at ADS were RMB0.09 and RMB0.9 respectively. As of September 30, 2022, the company had cash and cash equivalents, restricted cash, short-term and long-term bank deposits of RMB6.87 billion, compared with RMB6.64 as of December 31, 2021. Going forward, we will continue to focus on optimizing costs and improving revenue quality in order to deliver sustainable profitability. We will continue to improve our overall ROIs and enhance monetization capabilities to support the long-term development of our platform. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Q&A Session

Operator: And our first question will come from Lei Zhang of Bank of America. Please go ahead.

Lei Zhang: Thanks management for taking my question. My first question is , notice that we made some business adjustments and we changed our content plan this year, which was a margin improvement. So, can you share with us your current strategic focus and our business plan for the next year? Secondly, notice that we have a Q-on- improvement impacted two quarters in mobile MAU, what are the drivers for this? And how should we look at our MAU trend going forward? Thank you.

Shaojie Chen: Since updating our strategy two years ago, we have consistently executed towards the development of a game centric comprehensive content system. As we have communicated in the past earnings calls, this includes building an integrated content system, refining our operations and innovating services, while cultivating a healthy, positive, game-focused content ecosystem. In the line of current economic capacities, we have adjusted our short-term operational focus. Internet companies has been operating in average changing and highly complex since last year. As such, we have adopted a more sustainable operating strategy pre-actively cease acquiring overpriced copyrighted content and optimize our cost structure to ensure operational and financial stability for our business.

So far, this adjustment has delivered positive results. We grew our mobile MAUs for two consecutive quarters through continued investment in self-produced content and innovative services without relying on traffic from overpriced premium tournaments. We also managed to achieve positive adjusted net income for two consecutive quarters by streamlining our operations, improving revenue quality, and implementing stringent cost controls. We also refined our internal management practices. We adjusted our allocation of resources by dynamically evaluating and altering our operating strategies based on the ROI of each game. In the Peacekeeper segment, for example, our decision now to purchase the copyright of the Peacekeeper Elite League spring tournament early this year, was based on the relative low ROI performance of this segment.

As we refine our operations and deepen our cooperation with game developers ROI improved and we concluded that the timing was right to purchase the copyright of the Peacekeeper Elite League summer tournament. This allows us to regain the traffic from the tournament content well maintaining our operational prudence. We have a deep understanding of gaming industry, use of operating experience and the leading stream of resources. Leveraging these advantages we will continue to develop and strengthen our collaborations with game developers and invest in more in game centric self-produced content operating activities, as well as community building. At the same time, we will remain our advantages in high quality content and game operations and stabilized platform traffic by promoting our healthy and positive games ecosystem.

Going forward, we will continue to explore new business models, gradually improve revenue quality and boost operating efficiency through effective cost controls and expense optimization. By doing so, we will realize our platform potential for long-term and sustainable growth. As we have communicated before, DouYu is a game centric platform, which attracts and retains users by providing high quality game centric content. When we introduced our selective copyright procurement strategy, we expected to lose some users. The lack of some overpriced copyrighted tournaments means that users who primarily use our platform towards official tournaments will have less incentive to engage. Recognizing this, we implemented several strategies to stabilize traffic and maintain our overall MAUs, fostering the creation of high quality self-produced content and innovating our operational strategy.

This included increasing our investment in self-produced content and deepening our collaborations and operations with game developers. We expanded our content offerings based on the analysis of streamers end of users’ demands in order to meet the diverse content consumption needs of our users. In terms of all patients, we further emphasized our collaboration with game developers and deliver on users the of content services they wish to see and pay for. We achieved this by conducting joint operations with developers sharing game data in compliance with laws and regulations and designing innovative strategies for commercialization. As a result, our user count has grown steadily for two consecutive quarters. Let’s take a closer look at typical gaming segments.