Earnings Call: Q2 2021

Aug 16, 2021

Earnings release

Good morning and good evening, ladies and gentlemen. Thank you, and welcome to Douyu International Holdings Limited's 2nd Quarter 2021 Earnings Conference Call. At this time, all participants are in listen only mode. I will now turn the call over to the first speaker today, Mr. Mingming Su, Chief Strategy Officer at Douyu. Please go ahead, sir. Thank you. Hello, everyone. Welcome to our Q2 2021 earnings call. This is Mingning Su, Zohu's Chief Strategy Officer. Joining us today are Mr. Shao Jie Chen, Chairman and Chief Executive Officer and Mr. Hao Cao, Vice President of Finance. You can refer to our Q2 2021 financial results on our IR website at ir. Douyin.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 statement, risk factors and the details of the company's filing 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. Xiaodie Chen. During the Q2 of 2021, our overall performance remained stable as we continued to upgrade our business system. Total net revenues for the quarter reached RMB2.34 billion, while quarterly average paying user count reached 7,200,000. During the second quarter, our average mobile MAU increased by 3.9% year over year to 60 point 7,000,000. MAU growth was mainly driven by 2 factors. First of all, we attracted the new esports users and the governmentized the return of older users through large scale esports tournaments for the cards, which included major events such as our LPL Spring Grand Final 2021, LLL Mid Season Invitational and KPR Spring Grand Final 2021. 2nd, we refined our operations by enhancing our collaboration for hate games, including LYO and the Honor of the King. While exploring partnerships with additional game developers to introduce more mid and long tail games and the strengthening operations for new games. For Naraka: Black Point, a major hit game launched in the quarter, we collaborated with a game developer to develop and launch various promotional content and events starting in the testing stage. This effort have gradually attracted high quality player to our platform. Now turning to our content update. During the quarter, we continued to expand our content ecosystem both upstream and downstream to cover the entire e sports industry value chain. We also wrapped up our efforts to construct a comprehensive content library focusing on various game genres. By broadcasting and self producing Esports tournaments and events in various formats, we continued to develop more high quality Esports content. At the same time, we also continued to actively sponsor and invest in a number of top esports teams. During the quarter, we broadcasted over 50 large scale esports tournaments and self produced more than 80 high quality esports events. Among them, we leveraged the LOL preseason challenger matches to actively cultivate new high quality streamers and organize the match between streamers and the young training team to engage the content on our platform during the off season for premier esports events. In addition, the LTR Summer 2021 tournament, which is the highest level LYL professional tournament in China kicked off in June. We broadcast the tournament through our platform in concert with other related self produced programs for complete live streaming coverage of the event from start to finish. For our PLS1 tournament, the highest level professional leader for peacekeeper. We rolled out a series of promotional events such as live watch parties for tournament match, anchored by popular live streamers to further improve user engagement. Meanwhile, we continue to fuel the development of our content library by introducing additional game developers to make our content library more comprehensive and cover additional game genres. 1st, we utilized the Esports tournament broadcasters to further engage coverage for our blockbuster games. During the quarter, we hosted over 20 tournaments for games of various genres, including LOL, Honor of Kings and Peacekeeper. 2nd, we utilize the IP of popular streamers to create more high quality PGC content and meet the diverse content demand of users. Finally, we further enhanced user engagement based on their interest in high end strategy and gameplay by delivering content related to real time strategy and advice from streamers and high ranking professionals on matching in game description and equipment selection. We also implemented systematic marketing programs for new mid and long tail games. This campaigns are multi step process, which include the development and delivery of promotional content and events based on individual game life cycle. We began cooperating with game developers prior to the launch of beta testing for new games to foster anticipation and excitement among target consumers. We utilize the influence of our top customers to increase brand awareness for this new game. Meanwhile, by recruiting new streamers for games in advance, we are able to quickly fill the gap in game content after the game's official launch. Furthermore, we actively cooperated with game developers to launch a series of events to foster development of engaging video content. Through the broadcast of this content, more potential players are attracted to varying gaming broadcast. Additionally, our platform generates game related hot topics, introduces customized programs and the content to promote the game and allows the player to have interactions with KOL enabling us to attract new users and improve user experience. Now turning to monetization. In the Q2, our quarterly paying users were 7,200,000 with an AR PPO of RMB303. The slight year over year decrease in AR PPO was primarily due to optimally high user activity and AR PPO during the Q2 of 2020 released to stay at home orders from the pandemic. During the quarter, user behavior normalized to pre pandemic levels. Through our operating strategy and execution, we continue to focus on improvements in user engagement and paying user consumption. Going forward, we will work to further optimize our products, diversify our paid user centers and enhance our overall paid user experience to achieve a healthy ARPPU growth rate. Finally, we remain committed to refining our operations across different segments, which should help to further bolster segment efficiency. We are also making good progress on the R and D front. During the quarter, we launched AV1 decoding technology, becoming the 1st platform in China to support AV1 decoding in live streaming. Compared with our previous decoding technology, AV1 has lower bandwidth cost and can eliminate lag while maintaining the same video quality. In terms of product function innovation, our platform upgrades revolve around the evolution in our game content. Starting from live streaming, we have expanded to into produce video and graphic content. With our popular and new game segment as a primary subject. We have forged an integrated game segment that combines live streaming, video, visual graphics, friendly guides, interactive community and in game giving. We have also adapted our platform search function to support this multiple forms of content. By providing support for searching and existing historical live stream videos and the video graphic content on our platform. We can now better satisfy users' search crawler for specific game content. We also continued to fortify our foothold overseas. During the quarter, we continued to increase our investment in overseas market. In particular, I would like to highlight our achievements in Japan. According to the latest APP and E statistics, Miodun is one of the mainstream video game live streaming app in Japan and maintains an industry leading user base in the country. In terms of our future strategy, we will continue to strengthen the monetization capabilities of Muldam in order to further solidify its market position in Japan and also expect us to achieve best economies of scale in Japan. In summary, during the Q2 of 2021, we leveraged our platform advantages to achieve success on numerous fronts. We expanded our multi dimensional collaboration with more game developers. We also provide the gamers and the viewers with the comprehensive content offering combining live streaming, videos, video graphics and interactive community. Looking ahead, we plan to continue executing our product, streaming and content strategy to further augment our monetization capabilities and improve our overall financial performance. With that, I will now turn the call to our Vice President of Finance, Mr. Hao Cao to go through the details of our financial performance in the Q2. Thank you, Mingming. Hello, everyone. Total net revenues in the Q2 of 2021 were RMB2.34 billion. Live streaming revenues were RMB2.18 billion, compared with RMB2.32 billion in the same period of 2020. Advertising and other revenues were RMB1 RMB158.7 million compared with RMB188.3 million in the same period of 2020. The year over year decrease in live streaming revenues was mostly due to the abnormally high user activity and up in the prior year period caused by the stay at home orders during the pandemic. In the Q2 of this year, as the pandemic was gradually brought under control in China, user behavior had largely normalized, reverting to the pre pandemic levels. This decline was partially offset by our efforts to improve the spending by our core paying users. The year over year decline in advertising and other revenues was mainly due to the fact that game advertisers increased their marketing budget in the Q2 of last year due to the pandemic and the related stay at home measures. As a result, our overall advertising revenue in the Q2 of last year reached a relatively high level during the quarter as the pandemic was continuously brought under control in China and the number of hit games featured on our platform was reduced. Our game related advertising revenue decreased quarterly. Cost of revenues in the Q2 of 2021 increased by 2.3% to RMB2.03 billion from RMB1.99 billion in the same period of 2020. More specifically, revenue share fees and the content costs increased by 3% to RMB1.81 billion from RMB1.75 billion in the same period of 2020. This increase was mainly due to increased investment in overseas streamers as we continue to expand overseas market, higher licensing costs due to more investment in Esports tournament broadcasting rights and additional investment in proprietary content production. Family costs in the Q2 of 2021 decreased by 3.9% to RMB RMB161.8 million from RMB168.4 million in the same period of 2020. This decrease was mainly due to the successful execution of our ongoing in house technology upgrades, which led to higher bandwidth efficiency and lower bandwidth usage costs during the period. Gross profit in the Q2 of 2021 was RMB306.5 million compared with RMB522.9 million in the same period of 2020. Gross margin in the Q2 of 2021 was 13.1% compared with 20.8% in the same period of 2020. This decrease was primarily due to the decrease in revenues resulting in an increase in revenue sharing fees and content costs as a percentage of total net revenues. Sales and marketing expenses in the Q2 of 2021 were RMB295 1,000,000 compared with RMB142.1 million in the same period of 2020. This increase was mainly attributable to the increased costs from utilizing additional promotional channels for user acquisition and continued spending on both official and self produced live esports tournaments and corresponding sponsorship fees as the pandemic was gradually brought under control in China. Research and development expenses in the Q2 of 2021 were RMB123 1,000,000, which represented an increase of 29.6% from RMB94.9 million in the same period of 2020. This increase was primarily due to additional investments in technical personnel as we continued our overseas expansion and technology infrastructure upgrade to enhance user experience. General and administrative expenses in the Q2 of 2021 were RMB102.6 million compared with RMB79.5 million in the same period of 2020, primarily due to the increase in professional service fees during the quarter. Adjusted operating loss in the Q2 of 2021, which as fact share based compensation expenses was RMB165.1 million compared with an adjusted operating income of RMB272.7 million in the same period of 2020. Net loss in the Q2 of 2021 was RMB181.7 million compared with a net income of RMB319.3 million in the same period of 2020. Adjusted net loss in the Q2 of 2021, which excludes share based compensation expenses, share of income in active method investments and impairment loss of investments was RMB145.1 million, compared with an adjusted net income of RMB322.9 million in the same period of 2020. For the Q2 of 2021, basic and diluted net loss per ADS were RMB0.45 and RMB0.45, respectively, while adjusted basic and diluted net loss per ADS were RMB0.35 and RMB0.35 respectively. Going forward, we will continue exploring new methods of improving our monetization capability and efficiency. Additionally, as we continue to grow, we will focus on further utilizing our operating leverage to fuel the sustainable development of our platform. This concludes our prepared remarks for today. Operator, we are now ready to take questions. And the first question comes from Li Zhang with Bank of America Merrill Lynch. Please go ahead. Thanks management for taking my question. Two questions here. First is, can you give us more color on the new game that have good performance in Q2? And if we look at into second half, any new game that we can expect? 2nd delay, I want to hear your opinion on the traditional e sports game. What is the trend of those games in terms of time spent or users that you can share? Also, how should we look at the trend of the hardcore e sports game in the future? Thank you. Thank you. Let me answer these two questions. According to our platform data, new games such as Naraka, Flashpoint and CFHD, Crossfire HD have performed well since the Q2 of this year. From June to July, we observed that the overall live streaming volume and user engagement for Naraka Black Point increased by more than 200%. We have continued to generate PGC videos and built our content ecosystem for this new game. Such efforts have played an important role in promoting these games and elevating our users' platforms evenly. Based on expected launch schedule for games in the second half of this year, we expect that new catalyst for the gaming market will include LOL Mobile, Pokemon Unite and Justice Online. Prior to the launch of new games, we plan to collaborate with game developers to foster anticipation and excitement among targeted consumers and to deliver sufficient and rich game related content for gamers and users on our platform. And second question, the majority of our top 10 platform games are from traditional esports game genres, such as mobile and FPS, which are characterized by long life cycles and high entertainment quality. According to our platform data, our top 10 game genres have remained largely similar in the past several quarters. The data also suggests that users' time spent on non top 10 games over the past 2 quarters has gradually increased compared to the same period a year ago. We believe the primary reason behind this trend was the strategic upgrade of our platform. In the past, as a pure B2C platform, we use to only offer game related live streaming content to gamers and users. However, starting from this year, we have focused more on non evolved game. We have tried to create a separate segment for each new game on our platform. We are also converting with game developers to develop more comprehensive plans and quality content for game promotion through live streaming, video and graphic text content as well as our user communities. Such as in terms of live streaming, we can leverage our Taobu streamers to foster anticipation and excitement among targeted consumers prior to the launch of new games. By working with game developers, we can create multiple PGC videos and increase our number of promotional channels. For user communities, we can invite KOLs to have real time interactions with our users that generating more related hot topics and engaging content. As we continue to execute this product strategy, we expect that the time spent by users on non Esports game segments will increase and our platform content will become more diversified in the long run. Thank you. Thank you. Very helpful. The next question comes from Yi Wen Zhang with China Renaissance. Please go ahead. The first question is regarding the self produced tournament. In the prepared remarks, you mentioned there were over 80 self produced tournaments. And we also know that this year, there was an upward trend in the pricing and the license tournaments. That means that the US step up does produce content investment in order to tackle the increasing licensing cost trend. And then secondly, on the new game preparation, you mentioned a few in the previous question, for example, that we can manage mobile. How is our latest progress on the streamer recruitment? And in what way will we build up the top cohort streamers in the new game for the new game preparation? Thank you. And now we'll be translators. So basically this year, we have witnessed an increase in licensing costs for our Esports tournament broadcasting rights across the industry. So however, we expect the licensing costs for the broadcasting rights of major Esports tournaments to remain relatively stable over the next couple of years. And our expectation is based on our observation of current market conditions and the fact that the e sports industry has reached a pretty mature stage of development. And in addition, self produced tournament content has been a pretty important part of our content strategy as well. And the self produced tournaments such as the Golden Brand Tournament and the DNF All Star, they both have a pretty produced outstanding results on our platform. And especially the Douyu Golden Grand Tournament, has been held for around 11 seasons already and now has become one of the most important brand of Ophtho U. S. Well. And going forward, we will definitely continue to bolster the organization of our own E4 events and focus more on the generation of PGC content for non E4 games. And we are pretty confident that we will be able to leverage our enormous amount of quality streamer and video creator resource to you the strategy. Thank you. Next question, please. The next question comes from Alex Pang with Morgan Stanley. Please go ahead. I have two questions. First question is regarding the revenue share and content cost trend in 2nd quarter, including the different components, including the sign up bonus, revenue share and content procurement costs, etcetera? And how should we forecast this segment costs in the future given we have a little bit of revenue decline? My second question is related to the PC MAU number. This time, we have not disclosed the PC MAU number. What is the reason behind this? And if we remove the duplicated users, how much how many PC users do we actually have? Thank you very much. So for the first question, revenue sharing cost, We will maintain our 50 to 50 revenue split sharing policy for our platform and streamers as well as for our platform and tenant agencies. During promotional periods, we also offer certain incentives to streamers and talent indices. Therefore, while the overall revenue sharing ratio may fluctuate slightly quarter over quarter, it will also remain stable in general. The increase in content costs in the Q2 of 2021 was primarily associated with higher legacy costs and increased investment in sales produced programs. The increase in licensing costs was due to more investment in Esports tournament for casting flights across the industry starting from this year. The tournament intensity becomes higher, we expect licensing costs in the second half of this year to increase slightly from the first half of this year. For our self produced programs, as we invest more in programs to produce P and C content to support the upgrade of the content and functions of our new businesses. We expect associated costs to continue increasing at a moderate pace throughout second half of this year. Let me answer your second question. First off, our PC MAUs have remained relatively stable within the range of RMB110,000,000 to RMB130,000,000. Since our IPO in July of 2019, the quarterly functions were mainly driven by such factors as our periodic collaborations with PC game developers. In addition, the revenue contribution from live streaming on our PC portal has stabilized over the past several quarters. In the long run, we expect our mobile portal to be the primary driver for attracting users and generating revenue. As a result, we have decided to stop disclosing our PC MAUs starting from this quarter. With the user growth for non Esports blockbuster games still relatively under penetrated. We believe there is plenty of opportunities in the mobile market. In the future, we will deepen our collaboration with non esports game developers to better cultivate user spending habits and create a more welcoming contender ecosystem for our users. Thank you. The next question comes from Daniel Shen with JPMorgan. Please go ahead. I will translate myself. My first question is on the revenue side. We actually see that the second quarter revenue has declined on a year over year basis. Could management provide some more color on the rationale behind? And what's the paying user and ARPU trend for the second half of this year for live streaming? Secondly, it's on cash. So currently, as of Q2 of this year, we still have over 1,000,000,000 in terms of RMB1 1,000,000,000 of net cash. So how are we going to use this cash in the future? Thank you. The year over year decrease in revenues was mostly due to the abnormally higher news activities on the app in the prior year period caused by the stay at home orders during the pandemic. In the second half of this year, to further stimulate our paying users' purchase willingness and enrich their consumption scenarios, we will continue to focus on monetization activities and products Through our continuous focus on improving the engagement and consumption of our existing paying users, we hope to further elevate our ARP. As to the cash on hand, we are focused effectively using a strong balance of cash going forward. We will prioritize the sufficient allocation of cash to operational initiatives that drive the steady development of our game related business. These initiatives include exploring strategic content upgrades more actively, developing new business segments and continuing to invest in new growth drivers. For example, at end of last year, we rolled out a strategic plan to further enrich the content on our platform. We also increased investments in non Esports game segments to attract new users. Finally, we escalated our R and D spending to further explore new monetization models, which was in line with our aim to make games a major monetization channel for our game centric platform. On the other hand, we will take more initiative in the exploration of suitable investment and acquisition opportunities in our game related segment as well as downstream and upstream the Esports value chain. Through these investments and acquisitions, we will expand the depth of our exposure to a wider range of industry segments and generate more synergies within our existing businesses. Thank you. Thanks. The next question comes from Thomas Chong with Jefferies. Please go ahead. Thanks management for taking my questions. I have a question relating to the haunt of the M and A with Uya. When should we expect the cancellation of the deal to our operations? And can management comments about our business strategy as an independent platform? And the second question is relating to the competitive landscape. How should we think about the competition? Is it going to be more enhanced after the merger is canceled? Thank you. Okay. Thank you for your question. So since the rapid development of the domestic Internet industry over the past few years, so the authority have gradually improved the industry policy and regulation as well. So we believe that the antitrust regulations are in line with the government's goal of promoting positive and a fair competition among the Internet industry participants and thus to encourage a level of playing file across the industry. Therefore, so you fully respect this regulatory decision, actively cooperate with the regulatory requirements and operates in complying with the law. Sou Yu has been an independently operated and managed company since its inception. As a result, so we don't expect the decision will to prohibit our proposed merge with Huya by of the People's Republic of China to have a material impact on our operational and financial performance. As an independently operated and managed company, we will make continuous effort to maintain our steady growth momentum and also expand our content ecosystem, both on upstream and downstream to cover each link of E4 industry value chain. In addition to bolstering our industry leadership in the traditional e4 live streaming industry, we will continue to fortify our operations in non e4 segments to accelerate our growth and cultivate a game centric content ecosystem on our platform. The second question, so the game live streaming industry competitive landscape have not changed significantly since the Q2 of 2021. Since the streamer were barred from moving between the platform, competition and the industry has remained pretty healthy. So on top of this, our premium top and mid tier also the long tile streamer resource have helped us to create a strong competitive advantage in terms of both content and number of premium streamers. So therefore, enabling us to continuously maintain our industry leadership. So we have increased our focus on leveraging our unique competitive advantage to create more game centric content and also build e sports content community to attract new users. In addition to our continued effort in actively cooperating with transitional e sports game developers, we have left no stone unturned it in expanding our collaboration with other games developers. In our non Esports segment, we have not only covered the entire industry volume chain, but also reinforced our leading position as game centric and community basing platform in China. So this achievement is primarily attributable to our execution of operation initiatives based on the unique feature of non e sport games, such as user performances for graphic tags and video content. Our initiative included encouraging live streaming, video and community function integration. So strengthening our operations for the full life circle game, enhancing platform interactions between user and content creator and also creating a high quality proprietary content. Thank you for your questions. Thank you. The next question comes from Richie Sun with HSBC. Please go ahead. So the first one is the sales and marketing expense was growing very rapidly in Q2. Why is that? And what are the major traffic acquisition channels for us? And how would the traffic acquisition cost trend in the future? Sales and marketing expenses include staff salaries, channel promotion costs, esports teams, sponsorship fees and expenses for online and offline activities. In the Q2 of 2021, the increase in sales and marketing expenses was primarily due to our promotional activities for new product functions and increased marketing budget to attract new users, which was in line with the development of our new business. Our primary promotional channels for user acquisition are through those advertising agencies associated with Tencent and Disney Affiliates. We also leverage other news feed platforms and content libraries as additional music acquisition channels. And we are quite positive about development of the e sports industry in the long run and we will continue to increase our investments in each bus related activities and each bus team sponsorships going forward. Meanwhile, we will upgrade our product features to improve efficiency of our traffic conversion. We intend to continue enhancing our channel promotions. Therefore, in the future, we expect our sales and marketing expenses to remain at a relatively high level. Let me answer your second question. During the Q2 of 2021, we continued to invest and exploring the Japanese market. For our Japanese live streaming platform, Mail Down, we were able to maintain its market leading position in product functionality and content general diversity. Driven by its high quality content offering, Mail Dome continues to quickly attract new users. According to the latest APB and E statistics, Muldam is one of the mainstream video game live streaming IPBs in Japan and maintain an industry leading user base in the country. In terms of future strategy, we will continue to strengthen our monetization capabilities of Muldum in order to further solidify its leading position in Japan and also expect to achieve better economics of scale in Japan. No more questions, okay. Thank you again for joining us today. If you have any further questions, please feel free to contact us or request through our IR website. Thank you. Have a good day. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.