Lizhi Inc. (NASDAQ:LIZI) Q3 2022 Earnings Call Transcript

Lizhi Inc. (NASDAQ:LIZI) Q3 2022 Earnings Call Transcript November 16, 2022

Operator: Hello, ladies and gentlemen. Thank you for standing by for LIZHI’s Inc. Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s remarks, there will be a question-and-answer session. Today’s conference call is being recorded. I will now turn the call over to your host, Effy Kang, Head of Capital Markets for the company. Please go ahead.

Effy Kang: Thank you very much. Hello, everyone, and welcome to LIZHI Inc.’s third quarter 2022 earnings conference call. We did share our financial and operating results via newswire services earlier today, and they are available online. Participants on today’s call will include our founder and CEO, Mr. Marco Lai; our COO, Mr. Zelong Li; and our acting CFO, Mr. Chengfang Lu. Mr. Li and Mr. Lu will begin with prepared remarks, and the call will conclude with the Q&A session. As a reminder, this conference is being recorded. In addition, our earnings highlights presentation and a webcast replay of this conference call will be available on the IR section of our website at ir.lizih.fm. Before we continue, please note that today’s discussion will contain forward-looking statements made under the Safe Harbor provision of the U.S. Private Securities Litigation Reform Act of 1995.

These statements tactically contain words such as may, will, expect, target, estimate, intend, believe, potential, continue, or other similar expressions. Forward-looking statements involve inherent risks and uncertainties. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, many of which factors are beyond our control. The company is an affiliate, adviser representatives, and underwriters do not undertake any obligation to update this forward-looking information except as required under the applicable law. Please also note that lead this earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures.

Please refer to LIZHI’s earnings press release for a reconciliation of unaudited non-GAAP measures to unaudited GAAP measures. I will now turn the call over to our COO, Mr. Zelong. Please go ahead.

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Zelong Li: Hello, everyone. Thank you for joining our third quarter 2022 earnings conference call. In the third quarter of 2022, we will continue to advance our dual pillar of growth of interactive entertainment across the audio-based social networking business. We maintained steady growth in our overall business development while achieving new highs in both revenue and net income. In the third quarter, our total average mobile MAUs totaled $49.7 million. Average monthly paying users amounted to 477,000, and the revenue reached RMB565 million, up 12% year-over-year and 10% quarter-over-quarter. We also made great strides to optimize our product and operational strategies while promoting the development of our core technologies and boosting organizational efficiency across our global business.

Thanks to these efforts, we achieved our fourth consecutive quarter of net income on a GAAP basis, which rose 5% quarter-over-quarter to RMB19.8 million in the third quarter. Amidst the current macro conditions, our steady business growth and continued profitability are a strong testament to our market competitiveness and the sustainability of our business model. Next, I’d like to share more details regarding our business development in the third quarter. In terms of the order entertainment business, we continued to cultivate our audio community ecosystem by enriching our product metrics and enhancing our product competitiveness to create a highly active and engaged interactive audio entertainment community, further unlocking the commercialization potential of our audio entertainment business, we unveiled the diverse product features and functions in the third quarter to elevate the user experience.

Notably, based on our original interactive entertainment ecosystem, we launched the short audio content module, enabling users to enjoy immersive listening and producing short audio content. Meanwhile, leveraging a broad area of order activities in our platform to boost the interactivity within our community. We encourage the users to explore the innovative and interactive format of combining short audio content with audio-based social networking. In addition, to further strengthen user stickiness and engagement, we optimize our user management macimism to achieve dynamic upgrading user services and improving user experiences. In the third quarter, the average mobile MAUs of our interactive order entertainment business grew to $9.5 million, with its user penetration rate climbing to 19.1%, accompanied by an improvement in the average spend per paying user, contributing to our order entertainment business revenue growth.

In terms of our content creator ecosystem, with our focus on developing mid- and long-tail content creators, we upgraded our creative support policies to encourage the creation of high-quality content. We continue to improve our creation tools and functions, including audio scrip synchronization, AI noise reduction, and BGM inception, to enhance the overall creation experience. For example, we rolled out 1-minute Videorecording to 3D immersive audio filters and other features in the newly launched short-term audio content module. These features foster a flexible and easy-to-use audio creation environment, attracting more greater to produce and share high-quality audio content on our platform. In addition, through targeted operational activities, we generated diverse live-streaming topics and launched a variety of contests and events while upgrading and innovating the creator competition system to motivate creators and drive their ensues.

We also launched a new function with a range of innovative, customized mutual gifting options to help greater generate income and enhance commercialization efficiency. Regarding our global development, we have pivoted and focused on enhancing our globalization capabilities. As a result, we further advanced our global team building and continued exploring overseas market opportunities and refining our product matrix ecosystem. On the product end, we continue to optimize the features of our global social product, TIF by integrating real-time interaction and online entertainment as part of our continuous effort to build an interactive online space and well-rounded product system. The integration of our social tools together with simplified user patent enables users to enter their personal online space with one click and call their friends or interrupting real time in their public audio space, hence improving users’ real-time social networking experience.

As a result, Kia’s user engagement and activity grew further and both the new user fund interaction rate and average time spent per user maintained upward trends. In the third quarter, the average daily tons spend per user increased by 34% year-over-year, and the monthly average user group participation rate rose 94% year-over-year. At the end of September, the number of pairs of France connections grew by 56% compared with the same period last year. In terms of global team building and capability improvement, we continue to expand our global talent pool in core business regions, cooperating with international colleges and attracting local talent. We aim to enhance our globalization capabilities presenting talent cultivation and product operations to technology advancements in order to achieve breakthroughs in our international business.

As for technology development since unveiling our in-house hybrid cloud computing platform, voice cloud in August, we have continued to integrate core technologies and services. At the same time, we have promoted the worst cloud application to various business segments to boost our business back-end and middle-platform support by upgrading the automation capabilities of our testing platform. We improved our in testing efficiency and shortened the entire process from research and development to product launch. In addition, we have been ramping up the technical capabilities of our self-developed RTC real-time audio and video streaming technology platform and instant messaging platform, Modec. Our initiatives include expanding their business scope, promoting their application in diverse scenarios, facilitating the continuous innovation of auto products, and opportunity empowering our business.

Our long-standing philosophy is to prioritize our users’ math and strive to create value for them. While developing our global business, we have placed a significant emphasis on user data security and privacy protection. Recently, we have also been actively working on obtaining the certification of ISO-27001, the standard for information security management system, and ISO-27701, the standard for privacy information management systems. To continuously improve our platform data protection system, we are committed to complying with the highest international standards in data security and privacy to fully protect users drives and interests and fortify relationship trust with our users. In mid-October, we celebrated LIZHI’s 9th anniversary and announced our brand new mission and vision to be the world biggest audio platform using sound to make people feel closer and live happier.

Driven by our mission and vision, we will actively promote our strategic development with our unwavering efforts to advance globalization, pursue excellence and create greater value for our users and society at large. Thank you, all. With that, I will now turn the call over to our acting CFO, Ms. Chengfang Lu, who will discuss our financial results in more detail.

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Chengfang Lu: Okay. Thank you, Zelong, and hello, everyone. Our third quarter results are a testament to our strategic execution ability, with carte revenues growing by 12% year-over-year and 10% quarter-over-quarter to a new record high of RMB565.2 million. As we thus endeavor to optimize our operational efficiency, we achieved the profit for the fourth consecutive quarter on GAAP basis in the third quarter of 2022, with net income growing 5% sequentially to RMB19.8 million. Going forward, we aim to continuously develop our product metrics, strengthening core technological capabilities and unleash our commercialization potential to achieve sustainable growth over the long term. Now, I’d like to provide a brief overview of our financial results for the third quarter of 2022.

In the third quarter, our total net revenues were RMB565.2 million, representing an increase of 12% year-over-year, primarily due to growth in average user spending on our audio entertainment products. Cost of revenue was RMB376.2 million in the third quarter of 2022, representing an increase of 6% year-over-year, primarily due to an increase in the revenue share fees to accounting creators and the company’s revenue growth and partially offset by decreases in the canary and with benefits expenses related to decreases in our operational headcount and share-based compensation expenses. Gross profit was RMB189.1 million in the third quarter of 2022, representing an increase of 25% year-over-year. Non-GAAP gross profit was RMB180.8 million in the third quarter of 2022, representing an increase of 24% year-over-year.

Gross margin for the third quarter of 2022 increased to 33% from 30% in the third quarter of 2021. And non-GAAP gross margin for the third quarter of 2022 grew to 34% from 31% in the third quarter of 2021. Operating expenses were RMB176.6 million in the third quarter of 2022 compared to RMB191.3 million in the third quarter of 2021. Research and development expenses were RMB78.3 million in the third quarter of 2022, representing a year-over-year increase of 7%. The increase was primarily due to the higher salary and warfare benefits expenses, and rental expenses. Selling and marketing expenses were RMB71.2 million in the third quarter of 2022 compared to RMB88.2 million in the third quarter of 2021, primarily due to the decrease in branding and marketing expenses, partially offset by the increased salary and welfare benefits expenses.

The company will evaluate and adjust its marketing strategy and budget based on the company’s performance, operational lease, and market conditions. General and administrative expenses were RMB27.1 million in the third quarter of 2022 compared to RMB29.7 million in the third quarter of 2021, mainly driven by a decrease in share-based compensation expenses and other miscellaneous expenses. Operating income was RMB12.5 million in the third quarter of 2022 compared to a loss of RMB40.1 million in the third quarter of 2021 — non-GAAP operating income was RMB20.2 million in the third quarter of 2022 compared to a loss of RMB30.1 million in the third quarter of 2021. Net income was RMB19.8 million in the third quarter of 2022 compared to a net loss of RMB37.1 million in the third quarter of 2021.

And non-GAAP net income was RMB27.5 million compared to a non-GAAP net loss of RMB27.2 million in the third quarter of 2021. Base and diluted net income per ADS were RMB0.38 in the third quarter of 2022 compared to a basic and diluted net loss per ADS of RMB0.73 in the third quarter of 2021. Non-GAAP based and diluted net income per ADS were RMB53 in the third quarter of 2022 compared to non-GAAP basic and diluted loss of RMB0.34 in the third quarter of 2021. As of September 30, 2022, we had cash and cash equivalents, short-term investments and restricted cash of RMB623.1 million. Okay, this concludes all of our prepared remarks today. I will now open the call to questions. Operator, please go ahead.

Operator: Thank you. We have a question from the line of Vicky Wei from Citi.

Q&A Session

Vicky Wei: I have two questions. The first one is, will management share some color about the overseas business development as well as the amount of investment expense. My second question is will management share some color about your thoughts for when domestic product profitability potential in the longer term amid low in growth and challenging macro conditions.

Marco Lai: The first question is answered by Marco and I will translate for him. So the first question is about the overseas business development and investment expense. And for the development of our overseas business, we actually mainly focused on three aspects: Crodo, technology, and the team. In terms of product development, we are incubating new products targeting different overseas markets and focusing on our diversified product metric strategy. And we are aiming to leverage our core technology capabilities and experiences in product operation to achieve breakthroughs in our international business. So for the U.S. market, we are also continuously optimizing and integrating the TI app to improve the user experience of real-time interaction and online social networking. And we are seeing that in the third quarter, the users’ interruption rates and average time spent per user continued a very good upward trend.

Operator: Thank you for the questions. Ms. Wei, do you have any follow-up questions?

Zelong Li: Yes. I think Marco has a disconnection problem. We answered the questions. I will continue his answers as he mentioned about the technology and the products, and the team. So next, I can share more insights about the technology. So on the technology front, we actually further strengthened the application of our in-house hybrid cloud computing platform called was Cloud in many different business segments, and we also expanded our business growth, as mentioned by our COO, Mr. Li, earlier. And throughout continuously unleashing the technical potential, we actually achieved more innovations in voice technology. And we have also promoted refined and customized adjustments and integrations for our overseas products. and this has improved the user experience and fostered business development.

In addition, and regarding the Tin Building, Marco has mentioned and the talent canning in our overseas markets, we actually continue to focus on the target markets to actively expand the local teams and improve our operational capabilities in both the international and the local front, this has actually made a solid foundation for our globalization strategy. And in terms of the actual investment expense in the third quarter, our overall investment in overseas operations accounted for no more than 10% of the total operating expenses. — it includes the expenses related to sales and marketing and local office operations in the international team building, etcetera. So overall, we make long-term plans for resource or location, and based on different stages of business development, this has balanced our input and output.

We also strictly control and dynamically adjust the investment scale and including the timing and the specific strategies of the investment to ultimately maximize the operational efficiency. And in the future, we hope that our overseas business will bring us more diversified revenue sources and improve the overall profitability of the group and achieve solid business development. Yes. I think Marco has returned to the call. So Marco can answer the next question about the challenging macro and future profitability potential.

Marco Lai: Okay, thank you. During the third quarter, we reached a very good performance and new record highs for both total revenues and net income and achieved a profit for the fourth consecutive quarter. The audio entertainment business is actually a relatively mature segment within our group. And under the current macro environment, we are able to make timely and quick adjustments to our strategy based on our insights in the market environment. And in terms of the product function, we focused on meeting the core needs of our users. And in terms of the operation wise, we continue to refine our management of the users’ entire life cycle and content creator ecosystem. This strategic adjustment also helped us to improve our operational efficiency and increase profitability effectively.

In the mid to long term, the domestic business still has tremendous growth potential. And with the increase in the user penetration rate of the auto entertainment business, the market scale is also further expanding. And in the future, we will continue to expand the core user groups in the audio entertainment sector, and increased users’ wellness to pay through diversified operational activities and innovative functions and ultimately promoting the growth of paying user conversion rates and our overall revenue. In terms of our cost and expense structure, we will also dynamically adjust it based on the market feedback at different stages and continue to refine our user acquisition strategy and improve overall operational efficiency, help us achieve sustainable profitability in the domestic business.

Overall, we are very confident about the stable growth and sustainable development in the future. Thank you, Vicky.

Operator: If there are no further questions, now I would like to turn the call back over to the company for closing remarks.

Zelong Li: Well, thank you once again, everyone, for joining us today. If you have any further questions, please feel free to contact the company and our Investor Relations through the contact information provided on our IR website at ir.lizih.fm or the Piance Group Investor Relations. Thank you.

Operator: This concludes the conference call. You may now disconnect your lines. Thank you.