DouYu International Holdings Limited (NASDAQ:DOYU) Q3 2023 Earnings Call Transcript

DouYu International Holdings Limited (NASDAQ:DOYU) Q3 2023 Earnings Call Transcript December 7, 2023

DouYu International Holdings Limited beats earnings expectations. Reported EPS is $0.22, expectations were $0.01.

Operator: Good morning and good evening, ladies and gentlemen. Thank you and welcome to DouYu 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. Lingling Kong, IR Director at DouYu. Please go ahead, ma’am.

Lingling Kong: 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.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 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 involves 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 statements.

All forward-looking statements are expressly qualified in their entirety by the cautionary statement, 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. Before I provide an update on our business performance for the third quarter of 2023, on behalf of management, I’d like to briefly address the current recent situation concerning Mr. Shaojie Chen. As announced, DouYu have formed an Interim Management Committee to manage the company’s operations until further notice, as of now speak on behalf of our Interim Management Committee on Business update and the call will be handed to our Vice President of Finance Mr. Hao Cao for financial discussion.

In the third quarter of 2023 but 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 was 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 events, derivative self-produced content and promotions for new game launches. This provided meaningful catalyst in the form of 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, scouting 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 journey environment. With this continuous optimization to our ecosystem that houses our game-centric community, our overall possibility 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 cut back 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 tournaments events, fully capitalizing on the seasonality of the peak summer season. Second, our premium content and programs, [apparent] [ph] 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 accounting 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 continued to enhance our diversified tournament systems, broadcasting our 50 large scale official gaming events, including the League of Legends Pro League Summer Split, King Pro League, Dota 2 Bali Major and Riyadh Masters, as well as the Valorant Champions.

We drove out an area 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 join 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 an 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 [indiscernible] Cup, keeping users actively engaged in our game segment with best-in-class off-screen 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. Eggy Party has been a standout success this year. In partnership with its developer, we launched the Eggy Go, a premier PGC worldwide show featuring Eggy Party. From the initial video auditions to the later mentor-led group competition, all the way to the final round of in-person finals. 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 Eggy Party. In the meantime, amongst the program, we initiated a series of community operations and incentives for streamers in the Eggy Party segment, successfully gaining traction among both new and existing users and fortifying overall users’ stickiness.

This type of highly popular, high-quality content facilitates core 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 DouYu’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 forecast on the public release date, garnering widespread attention both within and outside the platform.

Our sophisticated content operations not only boosted the visibility and the pre-eminence of the new game itself, but also importantly underscores DouYu’s 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 2 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 offered some modestly priced revenue-generating products to accommodate the spending habits of mid- and long-tail users. Therefore, our quarterly ARPU 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 co-paying 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 has been with DouYu for 1 year or more, representing the member’s memorable moments spend with streamers, positively strengthening this 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 is the burden of manual review and resulted in an overall improvement in the efficiency of our content moderation. Secondly, our content-first function have been greatly enhanced. As we add more game categories and new games to our line up, the streamers in our game segments have 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 solution for gaming segment, which quickly improves 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 gives the desired content and improved overall content utilization efficiency. Crucially, accurate identification of content covered by each live streaming channel forms 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 the 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 firmly committed to legal compliance, and we will take necessary measures against any illegal activity which is in violation of the use 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.

Hao Cao: Thank you, Lingling. Hello, everyone. In the third quarter against a 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 conditions, 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 ARPU. Our quarterly ARPU 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 our 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 2012. The decrease was mainly driven by 2 factors. First, the decrease in revenue share 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. Bandwidth 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. Gross profit in the third quarter of 2023 was RMB 192.4 million compared with RMB 251.2 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. Adjusted net income, which excludes share-based compensation expenses, the share of income or loss in equity method investments, gain on disposal of investments 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, 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 faced 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 the macro headwinds, but also strive in evolving gaming content industry landscape.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Thomas Chong with Jefferies. Please go ahead.

Thomas Chong: [Foreign Language]. Thanks, management, for taking my question. My question is really about how the macro environment will affect the game broadcasting sector and how would that affect our operations? Thank you.

Hao Cao: Thank you for your question. Over the past 3 years, the environment in the domestic game live streaming industry has been in a state of meteoric change. From the macro perspective, policies and market and the overall economic environment are all essential factors to consider. Firstly, the live streaming industry has entered a stage of regular supervision. [Indiscernible] deeper and stronger requirements are being implemented for content review, compliance, operations, et cetera. Our goal is the long-term healthy development of the platform and activity cooperating with regulatory authorities. As always, we are committed to fulfilling the platform’s regulatory responsibilities. We will continually strengthen our compliance programs and regulate our operations across the platform with regular internal supervision, managing inappropriate live streamers and user irregularities.

We will also continue to optimize the content ecosystem and increase our investment in high-quality tournaments and programs that infuse positivity and quality content throughout our platform. These combined efforts aim to foster harmonious and healthy live streaming environment. Next from the perspective of the game market, game publishing has gradually resumed this year. The diversity of games and the users’ needs and the consumption habits for games are constantly changing, which brings more opportunities to our platform operations as an established the platform in the game live streaming industry but it’s continually upgrading and innovating our content operations and commercialization models. For example, new game promotions have shifted away from large-scale channel-related user acquisition to promotions that rely on a significant increase in content acquisition.

This change benefits our content creation and operations based on game characteristics. For example, in terms of content consumption, we have been exploring commercialization models beyond the virtual gifting over the past 2 years. Among this, the game membership business derived from our platform’s content and associated games has shown good growth trends. In addition, the economic cycle also affects our commercialization strategies, especially in today’s relatively weak economic environment. Users’ disposable income for entertainment related to consumption is decreasing. Since June of this year, we have seen a decline trend in mid-tier users’ willingness to pay. With this shift, we started offering some modestly-priced revenue-generating products and set up operation activities with low entry requirements.

These price adjustments and operations have helped us maintain paying users’ payment habits and the overall size of our paying user base. In the short term, we believe that the economic cycle will be the most important factor affecting the company’s operating performance. With the influence of these macro factors, DouYu faces both challenges and opportunities. We are prioritizing long-term sustainable development with an eye towards profitability. Our focus has been on stabilizing our traditional business fundamentals and optimizing our operational efficiency, primarily through adjustments to our marketing strategies and the cost optimization. As a result, the company’s adjusted profitability has significantly improved. Now that we have stabilized our financial position, we have more flexibility to invest company resources towards exploring new business, actively building and improving our platform’s gaming community and expanding our growth opportunities.

Thank you. Please next question.

Operator: Our next question comes from Derick Pei with Morgan Stanley. Please go ahead.

Derick Pei: [Foreign Language] This is Derick from Morgan Stanley. Thanks, management, for the time. Could you share a little bit more on the progress of the innovative business in terms of the launch of the new games? How would that improve the number of paying users and revenue? Thanks.

Hao Cao: In addition to the traditional virtual gifting business model, we are also leveraging our advantage in game-centric content operations to further explore new sustainable revenue streams. So far, among the numerous innovative businesses we have looked into, the membership business has shown the strongest growth momentum, while also promoting a diverse and sustainable revenue stream. Since early 2022, we have continuously improved and promoted platform-wide membership system, upgraded membership functions and upgraded membership benefits to enhance the companion attributes of our products and strengthen interactions between streamers and members. All of these target stronger retention among our core paying users, and our membership renewal rate has been steadily rising for several consecutive quarters.

Beginning in the second half of 2022, we designed and rolled out membership services that are more closely related to games. Through our deep cooperation with game developers, we were able to meet gamers’ demand for in-game items. Our game-specific membership service is well aligned with the platform gaming content and is both attracting new users and expanding our revenue streams. Apart from the membership business, several other innovative businesses and development have shown promising prospects and started contributing to our revenue. These innovative businesses remain relatively small in scale, and we are still evaluating their development trends and stability. We look forward to providing appropriate updates when they become more viable.

Overall, due to the high proportion of revenue generated from live streaming, our innovative businesses growth rates currently have a fairly limited impact on our paying users and revenue scale. Our virtual gifting business, on the other hand, comprises a significant portion of our revenue. Over the past 2 years, we have made a series of adjustments to our virtual gifting business such as lowering the frequency of revenue-generating operations and reducing low ROI activities. These adjustments were partly based on changes in the macro environment and partly on the changes in our operational priorities. Both were aimed at achieving the platform’s long-term healthy and sustainable development. Although our company’s overall user base and revenue growth were affected.