Earnings Call: Q1 2021

May 18, 2021

Earnings release

Good morning and good evening, ladies and gentlemen. Thank you and welcome to Daoyu International Holdings Limited's First Quarter 2021 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. Please note this call is being recorded. I will now turn the call over to the 1st speaker today, Ms. Mao Mao, Vice President of Capital Markets of Dow Yu. Please go ahead, ma'am. Thank you. Hello, everyone. Welcome to our Q1 2021 earnings call. Joining us today are Mr. Shao Jian 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 Q1 2021 financial results on our IR website at ir.souyu.com. You can also check a replay of this call when it becomes available in a few hours on our IR site. 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 following statements or selected events or circumstances after the date of this conference call. I will now speak on behalf of our Chairman and CEO, Mr. Xiaobin Chen. In the Q1 of 2021, we upgraded our operational system and steadily improved our operational performance with our average MAUs reaching 100 and 91,900,000 and average mobile MAUs reaching 59,100,000. Meanwhile, our quarterly paying user count was 7,000,000 and total revenues were RMB2.15 1,000,000. In this quarter, without the influence of COVID-nineteen, users' tipping habits have normalized, which caused our overall revenue growth to be relatively subdued in the period. Nevertheless, the breadth and depth of our game centric live streaming platform continues to perform well, attracting more users and fueling our platform expansion. During the quarter, our total average MAUs increased by 21.3% year over year to 191,900,000 while our average mobile MAUs increased by 4.5% year over year to 59,100,000. Such MAU growth was mainly driven by 5 factors. 1st, our broadcast of large scale Esports tournaments such as LPL Spring 2021, KPL Spring 2021 and Crossfire Pro League Spring 2021 continue to drive our user base expansion. Secondly, we explore deeper partnerships with game developers and refine our operations through jointly produced events for different game titles such as Peacekeeper, Honor of Kings and League of Legends. 3rd, we explored more organic synergies between game and entertainment segments. For example, during Chinese New Year, we facilitated streamer collaboration with both movie crew and celebrities to produce premium live streaming content in our Peacekeeper and PUBG segments. 4th, we ramped up our efforts 4th, we ramped up our efforts to provide a broader content mix through our video and communities business and thus provided users with better viewing terms through diverse content. In addition, as the pandemic subsided and China successfully brought the virus under control, the reopening of in person Internet space led to a year over year uptick in our PCMU. Now turning to our content updates. During the quarter, we continued to expand our influence up and down the Esports industry value chain. Moreover, to fuel the growth engine of our content ecosystem, we further refined our game centric live streaming business while diversifying our video and community content initiatives. In order to develop more quality e sports content, we utilized the large scale e sports tournament broadcast, self organized events and programs and sponsored and invested more in top e sports teams. We achieved the superior results during the quarter by broadcasting over 50 large scale Esports tournaments and self producing over 40 high quality Esports tournaments. We also implemented several innovative features for large scale Esports broadcast to better satisfy users' wide range of content viewing demand, differentiate our platform offerings and boost user engagement. During KPL spring 2021, for example, we provided users with a diverse set of viewing options around video, community and live streaming. Such options included watching games with celebrity groups, KBR tournament highlight reporting specialized programs designed for key game streamers as well as video and text post game progress. Additionally, during the LPL spring 2021 broadcast, we supplied users with exclusive game commentary and the supplemental live streaming room through which our exclusive top tier streamers delivers high level analysis and commentary to provide better user experience and enrich their content broadcast viewing options. And finally, we also added more interactive events to our crossfire Pro League Spring 2021 broadcast, which helps to better circulate traffic between tournaments and pre game shows, create better viewing experience for our users and stimulate user engagement. Beyond such platform innovation, we also worked to develop more in house tournament IPs. Consider our self produced Douyu DNF All Star Tournament, for example. Through this event, we maintained high level of user engagement during the quiet period after the official tournament end, supply D and F segment streamers with a large repository of tournaments and provide users with more premium and differentiated content. As we continue to accumulate more quality video content, we have also established a pyramid structure consisting of 3 content tiers. Our top tier video content features PGC content produced through our partner collaboration and by top tier streamers periodically, while our mid tier content features those produced by mid tier streamers and platform signed video content creators. At the bottom is video content produced by long tail streamers and video content creators as well as other high quality UGC content. Meanwhile, leveraging the monetization and engagement advantage of live streaming, we encourage video content creators to live stream on our platform, which helps them improve their overall income and increase the user engagement. We also recognize video advantage in content accumulation, distribution as well as extension and encourage our streamers to build up the video content profile on our platform. For our communities business, the 2 main functions are exploring games and facilitating more interaction between players, game developers, streamers and video content creators with our particular emphasis on game developer collaboration and increasing our influence among gamers. In fact, during the quarter, we organized several events such as to bring gamers, streamers, video content creators, game media outlets and game developers together, bolster the community engagement and better facilitate interaction. Now turning to monetization. In the Q1, our quarterly paying users were 7,000,000 with our paying ratio reaching 3.6%. Meanwhile, our ARPPU increased steadily on a year over year basis to RMB285. Although we saw the revision of users tipping behaviors to that of pre pandemic levels, As the pandemic was gradually brought under control in China, we continue to execute a proactive operating strategy centered on increasing user interaction to further stimulate users' pain habits and grow AR PPU. Going forward, we will work to further optimize our product metrics, diversify our pain scenarios and enhance our users' overall paying experience. Through such measures, we should be able to better attract and retain a base of high quality paying users and achieve a healthy ARPPU growth rate. Finally, we remain committed to refining our content operations across different segments, which should help to further boost our segment monetization efficiency. We are also making good progress on the R and D front. During the quarter, we released a new feature that allows streamers to live stream directly through their Internet browsers. By eliminating the process of downloading applications in advance, such as OBS and the Douyu live streaming tool, we have further reduced the threshold for new streamers to start live streaming on our platform. For cloud games, we tested cloud based live streaming tool, which made it easier for regular game users to simultaneously play and live stream games in Blu Ray video quality on our platform, thereby lowering the hardware barrier traditionally in place for the streaming. We have also continued to fortify our foothold overseas. During the quarter, we continued to explore and increase our investments in the overseas market. As a result, our Japanese game live streaming product, Miodun, currently maintains its leading position in Japan. In summary, during the quarter, we maintained a rigorous operating strategy and continued to develop an integrated content operation system around our 3 core business, live streaming, video and community. Such efforts have helped us to better position our platform for more sustainable growth over the long term. By successfully implementing these strategies, we have provided our core user group with significant benefits and thus paved the way for their steady growth. Looking ahead, we remain committed to refining our video and community business models to create an integrated content ecosystem with our game centric live streaming business as its foundation. We also plan to further execute several initiatives in product, streamers and content to consciously improve our overall monetization capabilities in the long run. 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 Q1. Thank you, Momo. Hello, everyone. Total net revenues in the Q1 of 2021 were RMB2.15 billion. Live streaming revenues were RMB2 1,000,000,000 compared with RMB2.11 point one 1,000,000,000 in the same period of 2020. Advertising and other revenues were RMB154.1 million compared with RMB165 1,000,000 in the same period of 2020. The year over year decrease in live streaming revenues was mainly due to the reversion of users' tipping behavior to that of the pre pandemic level as the pandemic was gradually brought under control in China. This decline was partially offset by our implementation of more effective operational strategies, which helped to improve the engagement level and paying behavior of key paying users on our platform in the peer room. The year over year decline in advertising and other revenues was mainly due to the trend of game advertisers normalizing their marketing expenditures, which were relatively higher in the same period last year due to the COVID-nineteen pandemic. As China has gradually brought the pandemic under control, advertisers' expenditures have also returned to their pre pandemic level. Cost of revenues in the Q1 of 2021 increased by 5.6 percent to RMB1.89 billion from RMB1.79 billion in the same period of 2020. More specifically, revenue sharing fees and the content cost increased by 5.4% year over year to RMB1.66 billion. This was because of the company's increased investments in the broadcasting rights for Esports tournaments, in house production of proprietary content and quality streamers in the overseas market. Bandwidth costs in the Q1 of 2021 increased by 12.6 percent to RMB170 2.1 million from RMB152.9 million in the same period of 2020. This was mainly due to the promotion of more high quality viewing options and was partially offset by our ongoing development of P2P and CDN technologies, which have helped improve our bandwidth efficiency. Gross profit in the Q1 of 2021 was RMB260.2 million compared with RMB RMB485.9 million in the same period of 2020. Gross margin in the Q1 of 2021 decreased to 12.1% from 21.3% in the same period of 2020. This was mainly due to the decrease in our total net revenues, which resulted in an increased proportion of revenue sharing fees and the common cost to total net revenues in the period. Sales and marketing expenses in the Q1 of 2021 increased by 95.5 percent to RMB209.9 million. This was mainly due to our increased sponsorships and promotions of esports tournaments as compared to the same period of 2020 during the COVID-nineteen pandemic as well as our increased promotional activities for user acquisition. Research and development expenses in the Q1 of 2021 increased by 19.8 percent to RMB111.3 million from RMB92.9 million in the same period of 2020. This increase was primarily due to our additional investments in technical personnel, particularly in the overseas market. General and administrative expenses in the Q1 of 2021 increased by 4.1 percent to RMB 88,100,000 from RMB 84,600,000 in the same period of 2020. Adjusted operating loss in the Q1 of 2021, which excludes share based compensation expenses, was RMB91.8 million compared with an adjusted operating income of RMB259.5 million in the same period of 2020. Net loss in the Q1 of 2021 was RMB101.8 million compared with a net income of RMB254.5 million in the same period of 2020. Adjusted net loss in the Q1 of 2021, which excludes share based compensation expenses, share loss in equity method investments and impairment loss of investments was RMB70.7 million compared with an adjusted net income of RMB RMB296.9 million in the same period of 2020. For the Q1 of 2021, basic and diluted net loss per ADS were RMB0.19 and RMB0.19, respectively, while adjusted basic and diluted net loss per ADS were RMB0.10 and RMB0.10, respectively. Going forward, we plan to continue exploring new methods of upgrading our monetization capacity and efficiency. Additionally, as we continue to grow, we will focus on further utilizing our operating leverage and fueling the sustainable development of our platform. This concludes our prepared remarks for today. Operator, we are now ready to take questions. The first question is from Daniel Chen of JPMorgan. Please go ahead. I will translate myself. My first question is on the Q1 mobile MAU. We have seen a slowdown in the growth rate to a 4.5% year over year. So what's the recent behind? And second question is on the overall user engagement level. In the Q1 also, we are launching some of the new business models such as the short video. So what's it going to be? What's the implication to the overall user behavior? Thank you. Thank you for your question. The year over year increase in MAU in the Q1 was mainly due to broadcasting major tournaments and sales to produce their content. It was also caused by the further diversification of content in our Video and Community segments, which had a positive impact on our user base. However, the trend makers recovery has led to lower year over year growth in our mobile MAU as compared to their rapid growth in the same period last year during the pandemic. In the long term, we expect our PC MAU to remain stable. Most user growth will be driven by the mobile side. In fact, we believe there is plenty of opportunities in the mobile market as moderate and lighter game user growth are still under penetrated. In the future, we will continue to improve our content development systems for live streaming, video and community business to bolster the daily growth of our mobile MAU. And as for the second question, user behavior is consistent with the trends we have seen over the past few quarters, and our platform continues to be highly sticky for users. To date, the average next month active user retention rate remains about 75%, which is stable in comparison with the previous quarter. Our user behavior data shows that as the number of users spent on our platform increased, their average monthly time trend on our platform also increased. This shows curve remains consistent for users who join us at different times as they gradually become our high quality and loyal fans over time. As our video and the community business at the moment, our user data shows that the amount of time spent by each user on our recording and video segments also increased quarter over quarter. This demonstrates the effectiveness of our video business in retaining users and converting them into our loyal users. Thank you. Thank you. The next question is from Lei Zhang of Bank of America. Please go ahead. Thanks management for taking my question. Two questions here. First, any updates on the merger deal with Huya? And do we see some impact from the tightening antitrust regulation? Secondly, can you give us more color on WeDo and the community new initiatives we launched last year? And for the Widu business, how should we compete with other Widu players? Thank you. Regarding your first question on the merger progress, currently the potential merger between us and Huya is still on track. And we believe that the step timing for this deal to be closed depends on the approval process by the relevant Chinese regulators. And with the rapid development of the domestic Internet industry over the past few years, we have seen that authorities have gradually improved industry policies and regulations and we believe that the antitrust regulation are in line with the government's goal of promoting positive and fair competition environment among these Internet companies, encouraging a level playing field across the industry, which will also help to support our long term development. And therefore, the entire entertainment segment, we also believe that the industry competition is still relatively fierce at this stage and we have the potential to further improve both our user scale as well as revenue size. So the goal of our merger is to further integrate the high quality resources on both sides to improve our operational efficiency and increase the overall value of the combined platform and ultimately unlock the greater growth potential in the future. Regarding your second question on our Video and Communities business, since last quarter, we have continued to diversify our content categories through these 2 new business segments. As we mentioned earlier, we established a pyramid content structure for our video business. On the top is our top tier video content, which contributed to a significant amount of viewership, which included video programs that we self produced and tailored streamers. And in the mid tier level, we hosted large scale self organized events such as the video contest spring season to maintain a steady supply of high quality content and double the number of daily active video content creators on our platform on a sequential basis. To date, we have accomplished our new term goal of establishing a stable supply of content for all mainstream video categories on our platform. And going forward, combined with the continuous content enrichment and more targeted promotional activity for users, we expect our video viewership to further improve. Regarding the community business, we launched the functions such as find games to promote more activities among users. Our users spontaneously developed their own player circles for different popular games such as LOL and Honor of Kings for game discussion and social purpose. And in addition, majority of professional tournaments, media outlets joined our community as well and produced a large amount of exciting reports during the current period, which further diversified our content and contributed to an engaging community environment. And as a large community with the greatest density of game players, our community naturally grows into an effective marketing and promotion channel for the game developers. So for this quarter, we have with the presentation and introduction for over 30 kinds of different console games and mobile games and successfully converted a significant amount of users into game players. On the differentiation on the video business, as a leading game centric integrated content platform in China, we have already established a relatively high barrier for both the top tier live streaming content as well as the quality streamers resources. During the quarter, we gradually explored the organic synergies between the live streaming and video content. We leveraged our strength from the live streaming business in user engagement and monetization, encourage more video content creators to live stream on our platform and help them increase their overall income. And by utilizing features like fully chat, we also improved user engagement. And at the same time, we recognize the video advantage in content distribution accumulation as well as expansion and we encourage our streamers to improve their platform influence by building up the video content profile on our platform. And furthermore, we have also gradually built a connection between our video and community business. In our community, we attracted and established a close partnership with a large number of game developers and professional tournament media online. We also collaborate with a large number of official game account to produce exclusive high quality PGC further improving our influence in the game industry. While users watch the high quality PGC game content, we provide them with the opportunities to directly interact with those game developers and tournament media outlets. So this helps to improve the user engagement and participation. Next question please. The next question is from Fei Zhaozhou of Haitong International. Please go ahead. Thanks management for taking my questions. I have three questions. First, we noticed that Huya has signed 5 year exclusive media rights with LPL. So what's the impact to those? Are you going to incur additional like content cost? And second question is, what is the sequential growth of the broadcast to write cost? And how should we think about those future investment in the cost considering the fierce competition right now? And lastly, could you please elaborate more about the reason on the sequential decline of live streaming revenue? Thanks. Thank you for your question. For the League of Legends Pro League, we expect to broadcast this tournament as well. So in terms of broadcasting official tournament, our content will not experience any negative impact. As one of our most popular game segments, League of Legends has a larger pool of famous streamers, loyal game players as well as different tiers of streamers and content type. So we believe that we will be the go to platform that users choose the first to watch the tournament. Moreover, we plan to develop a multi angle tournament, building experience for users. We will accomplish this by generating game content through our video community and live streaming segments and provide users with more fun to watch tournaments on Douyu with different content options. We believe our League of Legends segment will maintain content creativity and industry leadership while continuing to generate greater user traffic. Regarding your question on the expenditures, in the Q1 of 2021, our broadcasting rate costs decreased on a sequential basis. This was due to the fact that we amortized most of our broadcasting write costs for the League of Legends World Championships in the Q1 of 2020. In the Q1 of 2021, our broadcasting rights cost returned to their regular levels. As a leading game live streaming platform in China, we are committed to enriching our content categories and improving our content quality. So we will continue to purchase broadcasting rights for quality esports tournaments. As new game titles continue to increase and our platform's tournament category coverage improves, the absolute amount of our broadcasting rights will also continue to increase at a steady pace for this year. As to the live streaming revenues, the Q1, which includes the spring festival holiday, is traditionally the off season. During the period, streamers usually chose to spend more time with their families, and the overall live streaming volume is generally at its lowest in a given year. The overall number of paying users also declined in the Q1 of 2021. Although we were affected by seasonal factors, we maintained an active and effective operating strategy to stimulate our core paying users' interactions and purchase awareness, which helped to create sequential increase in our AR PPU. Going forward, we will continue to improve this segment's monetization efficiency by refining our operations. Furthermore, we will deepen our collaborations with talent agencies and customize monetization products to increase the income and monetization efficiency of our mid tier streamers. Two questions. First is for the revenue sharing ratio, can management comment on the drivers behind it and what will be the trend going forward? And second of all, it's sales and marketing and G and A expense. Can management comment on the change in 1Q and what will be the trend going forward? Thank you. We will maintain our 50 to 50 revenue split sharing policy for our platform and streamers as well as our platform and talent agencies. During promotional periods, we will offer certain incentives to streamers and talent agencies. Therefore, while the overall revenue sharing ratio may fluctuate slightly quarter over quarter, it will remain stable in general. As a game centric live streaming platform, we will continue to invest in content related to esports games and potential blockbuster titles, especially for top esports tournaments and premium self produced content. At the same time, we will actively enhance our overseas streamers' resources and enroll new streamers in new game segments. Overall, our content cost will show upward trend. Sales and marketing expenses include staff salaries, channel promotion costs, e sports teams sponsorship fees and expenses for offline and online activities. In the Q1 of 2021, sales and marketing expenses increased on a sequential basis. This increase was due to our increased investments in user promotional activities, which was in line with the development of our new businesses, including video and community. We are quite positive about the development of the Esports industry in the long run, and we will continue to increase our investments in Esports related activities and Esports team sponsorships going forward. Meanwhile, we will upgrade our product features to improve the efficiency of traffic conversion. We also intend to enhance our channel promotions. Therefore, in the future, we expect our sales and marketing expenses will increase steadily. For the Q1 of 2021, G and A expenses decreased on a sequential basis, mainly due to the fact that most of our merger related professional services fees were booked in the Q4 of 2020. Therefore, these expenses had already returned to their regular levels by the Q1. Going forward, we expect G and A expenses to grow at a slow and steady rate. Thank you. The next question is from Sabrina Chong of Jefferies. Please go ahead. Thank you for your question. According to our platform data, our official tournament viewership has increased steadily, especially for larger scale official tournaments like LTRO Screen. We have launched interactive events in major Thailand and customized video. We have also introduced unique live streaming room through which streamers and commentators can live stream during tournaments. Our broader portfolio of content initiatives has helped to increase users viewing options and engagement, leading to year over year increase in our overall U. V. And number of acquired users. Today, we already have a relatively complete and major broadcasting system for official tournaments. We also continue to innovate in content through surrounding programs. As a result, we believe that we can bring more high quality new users to our platform going forward. We note that our users have shown more loyalty to high quality live streaming content on a relative basis with our competitive live partners in the industry. Therefore, despite the fact that nowadays some large scale esports tournaments chose to broadcast on multiple platforms. We haven't seen any traffic diversion occur on our platform. Thank you. This concludes our question and answer session. I would like to turn the conference back over to management for closing remarks. Thank you for joining us today. Have a good day. The conference has now concluded. Thank you for attending today's presentation. You may