Earnings Call: Q4 2020

Mar 23, 2021

Good morning and good evening, ladies and gentlemen. Thank you, and welcome to Douyu International Holdings Limited 4th Quarter and Full Year 2020 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. Mao Mao, Vice President of Capital Markets of Douyu. Please go ahead, ma'am. Thank you. Hello, everyone. Welcome to our Q4 and full year 2020 earnings call. Joining us today are Mr. Shao Jie Chen, Chairman and Chief Executive Officer Mr. Meoming Zhu, Chief Strategy Officer and Mr. Hao Cao, Vice President of Finance. You can refer to our Q4 and full year 2020 financial results from our IR website at ir.souyu.com. You can also check the 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 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. Shao Jian Chen. During the Q4 of 2020, both our financial and operating results maintained their steady growth momentum as we total our total revenue ramped up by 10% year over year to reach RMB2.27 billion in the period. At the same time, our average mobile MAU increased by 6.9% year over year to 68,200,000 and our quarterly paying users expanded by 4.6% year over year to 7,600,000. While the residual impact of COVID-nineteen persists throughout the macro environment, our game centric live streaming platform continues to flourish and attract additional users in the period. In the Q4 of 2020, our total average MAUs grew by 5.2% year over year to 174,000,000. Such healthy expansion was mainly due to 4 factors. 1st, broadcasting large scale Esports tournaments, including the League of Legends Season 10 and KPL for 2020, along with the rising popularity of our self organized tournaments, including CUBG Gold Grand Tournament Season 11 and Peacekeeper Gold Grand Tournament Season 1 continues to fuel our user base expansion. 2nd, the releases of multiple new titles, including Call of Duty Mobile, World of World Cup 9.0, Moonlight Blaze Mobile and DSNH Kill Rock further enriched our platform's content and attracted new users. 3rd, our in-depth cooperation with game developers such as Peacekeeper, 1 of Kings and League of Legends for the joint operation of tournaments and refinement of platform cooperation for different games help to cultivate an increasingly engaging and active platform environment. Finally, our efforts to build diverse community and provide a wider range of content viewing options through our video segment serves to be better satisfy the full spectrum of users' demand. Now turning to our content update. During the quarter, we remained committed to cementing our industry leadership, fueling the growth of our game centric live streaming business and expanding the depth and breadth of our content offerings across all segments. Not content to maintaining the biggest growth, we also launched the version 7.0 of our Zouyu NTT through which we have established our video content and further refined our community segment to develop a fully integrated system along the in store data chain. In the Q4, our efforts to sponsor high quality e sports team delivered exceptional results. Crucially, e sports teams have continued to occupy a key role in the broader e sports industry. And therefore, we have continued to invest in this area. During the quarter, our sponsored LLL team, TES, won the Dameshia Cup 2020 Championship and our self developed owner of King's team, EYG, won the King Pro League All 2020 Championship. We were pleased to see our cooperating team deliver 1st rate performances and believe that such efforts will continue to both supercharge our brand influence and compound our differentiated e sports advantages going forward. Beyond this success, we also continued to take our tournament broadcasting and self produced events to the next level. As such, during the quarter, our game developer collaboration throughout, reaching more than 90 large scale e sports tournaments in total and featuring the 2020 League of Legends World Championship, King of Pro League. More specifically, through our close collaboration with the Crossfire Mobile Team during the Crossfire Mobile League, we developed a joint membership system, which pioneered a more creative way to cooperate with game developers. For in house events, our self produced Beachkeeper Golf Brand Tournament Season 1 proved to be so popular that it became one of the most widely anticipated and commented on Peacekeeper Tournament in December. As an even split of 30 PEL and PN League teams came together to compete, viewers were brought to the edge of their seats during the one of a kind tournament experience. Importantly, we self produced more than 15 tournaments, which enabled us to establish a solid foundation for future growth in this area. And we plan to organize more tournaments in house to drive growth going forward. Looking ahead, in terms of content operation strategy, we plan to continue building our community and the video business on top of our solid game live streaming information. By leveraging these strengths, we will drive parallel business development and build an integrated ecosystem. For live streaming, we remain focused on developing more best in class e sports content, which will include both partners and self produced e sports tournaments and programs. For videos, we have already completed the initial stage of infrastructure development and experimented with multiple quality PGC content. Going forward, we plan to engage with more quality short form video content creators in order to further enrich and expand our library of video offerings. Finally, for our community, we plan to further amplify users' game discovery, introduction and discussion through the cultivation of more interest groups based on our previous feedback. Now let's turn to our monetization progress. During the quarter, as we continued to refine our monetization products and introduced more paying scenarios to enhance our user paying experience, we increased our quality paying users by 4.6% year over year to 7,600,000 and grew our paying ratio to 4.4%. Our quarterly ARPU also increased by 4.6% year over year to RMB273. Looking ahead, we plan to continue rolling out more innovative initiatives and events to enlarge our paying user base. Furthermore, we remain committed to the ongoing exploration of innovative product functions and monetization events as well as refining each segment of our content operations. Such efforts will help to augment our platform's operating efficiency and boost amortization efficiency of our content segment and drive to new rules. We also continue to make good progress on the R and D front. As a result of our collaboration with Tencent, for example, we became one of the 1st content platforms to utilize the video streaming protocol RMTP over SRT on our mobile application in the quarter. This technology enabled streamers to live stream smoothly regardless of weak network environment, creating package loss rates of up to 40% and has thus significantly expanded the range of live streaming scenarios available to users on our platform. For example, with the support of the new technology, our outdoor gamers are able to diversify their content scenarios, live stream and deliver high quality brain in the environment of bad Internet connection. On the international front, we have continued to invest in and explore the potential of the Japanese market. Muldum, our Japanese game live streaming product, continue to benefit from the inroads we are making in Japan. Our ongoing investments in the platform and our deep expertise in the game live streaming space. As a result, Muzan has continued to perform well, maintaining its leading position in Japan. In summary, during the Q4 of 2020, we continued to enhance our operational and financial performance at a healthy pace. Going forward, we plan to leverage our established foundation in live streaming to further develop and refine an integrated ecosystem for our 3 core business, live streaming, video and community. In order to advance our platform monetization capabilities and financial performance, we will continue to implement initiatives in several areas, including product development, streamer management and content operations. Such efforts will not only help to fuel our long term business growth, but will also serve to unlock the additional value up and down the game live streaming industry value chain, while providing our shareholders with lasting value. 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 Q4. Thank you, Momo. Hello, everyone. Overall, total revenues in the Q4 of 2020 increased by 10% year over year to RMB2.27 billion, while total revenue in the full year of 2020 increased by 31.8 percent year over year to RMB9.6 billion. Additionally, in the full year of 2020, adjusted net income was RMB541.6 million and adjusted net margin reached 5.6 percent, implying a net increase of approximately 80 basis points from the prior year. Total net revenues in the Q1 of 2020 increased by 10% year over year to RMB2.27 billion with around 91.3% of total revenues generated from live streaming and the remaining portion generated from advertising and others. Live streaming revenues in the Q4 of 2020 increased by 9.4% to RMB2.07 billion from RMB1.89 billion in the same period of 2019. This increase was primarily attributable to our platform's improved user paying experience, which continued to be driven by our ongoing product refinement efforts as well as our simulation of user paying habits resulting from our increased application of platform paying scenarios. As a result, paying users in the Q1 of 2020 increased to 7,600,000 from 7,300,000 in the same period of 2019. In addition, the enhanced diversification of our content ecosystem helped to improve the monetization efficiency of both game and non game segments of platform. As such, our app increased to RMB273 in the Q1 of 2020 from RMB 261 in the same period of last year. Advertising and other revenues increased by 16.5 percent year over year to RMB198.5 million, mainly driven by our expanded brand influence and the corresponding increase in advertising demand for competitive advertising and promotion solutions. Cost of revenues in the Q4 of 2020 increased by 23.7 percent to RMB2.09 billion from RMB1.69 billion in the same period of 2019. More specifically, revenue share fees and content costs increased by 25.6% year over year to RMB1.85 billion, which could generally be explained by the following drivers. First, our content cost increased as we invested more in the broadcasting flights for Esports tournaments and the in house production of proprietary events to further enrich content on our platform. 2nd, our revenue share fees increased, which was in line with our total revenue growth. 3rd, we continue to invest quality streamers in the overseas market. Bandwidth costs in the Q4 of 2020 increased by 12.7 percent to RMB170.7 million from RMB 100 and 51,400,000 in the same period of 2019. This was mainly due to our introduction of more high quality viewing options, such as 4 ks high definition live streaming content, which provided users with better viewing experiences and further satisfied users' viewing demands. Gross profit in the Q4 of 2020 was RMB182.2 million, compared with RMB375.2 million in the same period of last year. Gross margin in the Q4 of 2020 was 8% compared with 18.2% in the same period of 2019. The decrease in gross margin was mainly due to the increase in revenue sharing fees and the content costs as a percentage of our total revenues. Sales and marketing expenses in the Q4 of 2020 increased by 27.3% to RMB170.7 million from RMB134.1 million in the same period of 2019, mainly driven by the increase in the promotional activities of K2 units as well as the increase in prices for our self produced events. Research and development expenses in the Q4 of 2020 increased by 18.6 percent to RMB118.9 million from RMB100.2 million in the same period of 2019. This increase was primarily due to our development and improvement of video related technologies as well as our application upgrades. General and administrative expenses in the Q1 of 2020 increased by 54 percent to RMB117.7 million from RMB76.4 million in the same period of 2019, mainly due to the increase in professional service fees related to our potential merger with HUDA. Adjusted operating loss in the Q1 of 2020, which excludes share based compensation expenses, was RMB199.1 million compared to adjusted operating income of RMB141.5 million in the same period of 2019. Net loss in the Q4 of 2020 was RMB228 point 7 million compared to net income of RMB157.4 million in the same period of last year. Adjusted net loss in the Q1 of 2020, which excludes share based compensation expenses, share loss in equity method investments and impairment loss of investments was RMB176.9 million compared to an adjusted net income of RMB186.4 million in the same period of 2019. For the Q1 of 2020, basic and diluted net loss per ADS were RMB0.61 and RMB0.59, respectively, while adjusted basic and diluted net loss for EditX were RMB0.45 and RMB0.45, respectively. Going forward, we will continue to explore our monetization capacity and efficiency. We will also further utilize our operating leverage while staying flexible to the sustainable development of our platform. This concludes our prepared remarks for today. Operator, we are now ready to take questions. Thank you. We will now begin the question and answer session. The first question comes from Lia Zhong from Bank of America. Please go ahead. Thank you, management, for taking my question. My question is regarding the merger deal with Huya. Do you maintain your timeline to complete the deal by 1st half this year? Secondly, regarding the anti government regulation about the Internet space to see any impact to our mobile deal? Okay. Thank you for your question. Currently, the potential market between Douyin and Huya is still on track. Our teams are eventually collaborating with 3rd party agencies and working around the clock, but the exact timing of the closing also depends on the approval process by the SEC and relevant domestic regulators. As such, we are not able to share the closing data for now. And for your second question, as we know, authorities have gradually improved the industry policies and regulations following the rapid development of the domestic Internet industry over the past few years. We can see that the regulators have issued revised antitrust guidelines with the goal of promoting positive and fair competition among Internet Industry participants. Through these guidelines, we expect a level playing field across the industry, which will also support Douyin's long term development. For the entire Pan Entertainment segment, we believe that industry competition is still relatively fair at this stage. While the overall competitive landscape continues to trend, we believe that Douyu has the potential to further improve its user scale and revenue performance. One of the key goals of our merger with Huya is to further integrate the high quality resources of the 2 platform, improve our operational efficiencies and work with Tencent to jointly expand our service offerings along the e sports value chain as well as in the online entertainment segment. This will increase the overall value of the combined platform and unlock greater growth potential in the solutions. Thank you. Yes. Thank you. The next question comes from Daniel Chen from JPMorgan. Please go ahead. So my question is related to the competition landscape. So could management give us some update on the competition landscape since the Q4 this year in the game streaming industry? And also after the potential merger with Huya, what kind of the change are we going to see in the market in terms of the competition? And also as we have already signed a merger agreement, so what kind of important procedure are we going to see in the future before the transaction happen? Thank you. So regarding your question on the competition, we believe that the industry's competitive landscape has not changed significantly since the Q4 of last year. And as a leading game centric platform, we would continue to build our game centric content ecosystem and explore other game related areas, such as video and community segments on top of our live streaming content. And so I think on the short form video platform enter the game live streaming market, we have seen both traffic and customer diversification increase, which has also helped to raise the ceiling of the entire game live streaming market. We took this opportunity and launched the version 7.0 of our app at the end of last year. And with the updated and refined video and the community content, we can now provide more diversified content to our users. From the competition perspective, we believe that the industry competition in the short run mainly revolve around the refinement of segment operation and the high quality content and certification of monetization as well as rapid deployment of blockbuster games. And in the long run, we expect that recognition will focus on the rapid product upgrade and innovation of content forms such as video entertainment content, the development of communities such as the in store community and the integration of resources both top and down industry value chain. And we have been focusing on building game centric content platform since inception and we have clear advantage in terms of professional content creation and content accumulation, vertical game user base formation and build up of talent agencies as well as cultivation of professional e sports content ecosystem. Now we have created a stronger content barrier and as a result, we have clear leading advantage in terms of attracting and maintaining a core game user base. So looking forward, we believe that with the lifted ceiling of the entire industry, we will take advantage of the dimension content and value chain strength to further expand our user coverage and user traffic. And after the merger, we expect more in-depth commercial cooperation between the two platforms as well as with Tencent, which we believe will further enhance the positioning of the combined entities. And to your second question, as Mr. Fu just responded, currently the merger is still ongoing and we are looking forward to our next steps, including getting approval from the SEC and from the relevant domestic revenues. And for now, we cannot really tell if that's timing for the deal. Thank you. The next question comes from Alex Lu from China Renaissance. Please go ahead. I'll translate myself. Thanks management. I noticed that the company has made a notable investment on short video and the virtual community in the past few months, could management share more color there? And the second question is on the League of Legends Championship, what are the major takeaways and observations from that event? And finally, what are the major revenue drivers for Okay. Regarding your first question, we are currently developing the video and community segments on top of our live streaming products and content and expect these 3 avenues to become the key pillars for our integrated game centric content ecosystem. For live streaming, we will continue to produce high quality e sports content. In addition to our existing games, we will also closely monitor any new blockbuster games in the market, explore new vertical games attractive to our users, develop our own in sports events and programs and produce more content related to the official in sports tournament. And secondly, for our video business, we have already completed the 1st phase of infrastructure development and we have already launched the version 7.0 app with updated video and community segments at the end of last year. And we have also introduced video content creator incentive program to accelerate the UGC generation on our platform. And together with our PGC, we have established an extensive content library to satisfy users' diverse demand. And in addition, for our community business, we upgraded the community segment based on Yifan and creative interest groups, focusing on game discovery, introduction and discussion. Let me answer your second and third question. The second question is about the SM tournament. As we know, the League of Legends World Championship is the largest League of Legends official annual tournament and has always attracted a larger number of viewers. In the first half of twenty twenty, many large scale offline Esports tournaments were postponed or canceled because of the pandemic, making S10 one of the few global Esports events of 2020. Organized in Shanghai, S10 attracted strong domestic viewership and was widely followed by Internet users in China. The League of Legends has always been a strong segment on ZOE's platform. In fact, we have a large number of well known streamer resources and a marketplace streamer and contender system for this segment. In addition, we signed contracts with many famous domestic and international league of Legends Esports teams such as RGG, JDD, TES and TWG. Combined with these trends, our exclusive partnership with multiple social platforms made us the most popular game live streaming platform for the LRO championship and that Zhou would record high operating metrics during the tournament. It also helps us attract more high quality user traffic to cement our platform as a go to destination for watching our tournaments. And for your 3rd question about how to increase revenue, we will continue to derive and refine our monetization products, pair this product features based on different user profile, improve existing users' IRPPU and cultivate new users' paying habits to further improve daily revenue contribution and paying ratio. To maintain sustainable revenue growth, we plan to leverage our platform wide event and small scale monetization events to raise our penetration, and change rate of paying users and RPPO. Under our game centric content ecosystem, we will further diversify our content offerings and increase revenue contribution of our non game segments by channeling user traffic to segments with relatively high monetization efficiency such as entertainment and talent show. Thank you. Thank you. The next question is from Faiya Zhao from Haitong International. Please go ahead. So my first question is what is the revenue split by game and non game content and our outlook of the ARPU and number of paying users in 2021? And my second question is could you please give us the breakdown of the content cost in the first quarter and also the trend of the signing up bonus for the broadcasters in the past few quarters? And how should we think about the trend going forward? Thank you. Let me answer the first question. We expect our game segment to continue to be the major live streaming revenue contributor to our platform. The game segment has demonstrated its strong growth potential in both ARPPU and total paying users. Revenue generated from our game segment is expected to account for 50% of our total revenue in 2021, and we plan to increase this percentage going forward. For nongame segments, we will increase the revenue contribution by strategically allocating traffic between segments. As we continue to focus on platform wide monetization events and increase the frequency of small scale monetization events, explore more similar to cultivate users' paying habits and increase their willingness to pay. Both our total paying users and ARPPU will further increase. Regarding your question on the sign up bonus. The quarter over quarter increase of streamer sign in bonus during the Q1 was due to two reasons. First, we continue to recruit new streamers for newly launched game segments to maintain a high quality content offerings on platform. 2nd, we increased our investment to acquire streamers in the overseas market. Looking ahead, the signing bonus will increase at a stable rate due to a rapid international expansion and increasing signing bonus of overseas streamers and hot streamers from new game titles. Our last question comes from Thomas Chong from Jefferies. Please go ahead. Thanks management for taking my questions. I have a question regarding the bandwidth costs. Can management comment about the sequential trend in Q4 as well as how we should think about the driver for the bandwidth cost going forward? On the other hand, for sales and marketing expenses, can you also comment about the sequential change as well as the driver for sales and marketing going forward? Thank you. Okay. With respect to the bandwidth cost, in the Q4, bandwidth cost increased slightly because of intensive tournaments and more frequent usage period. Apart from that, we provided users with more high quality live streaming video options such as 4 ks high definition video. We expect bandwidth cost in 2021 to increase along with the increase in users. However, bandwidth cost as a percentage of total revenue would continue to decrease. The second question is about sales and marketing expenses. Sales and marketing expenses, excluding share based compensation, mainly include staff salaries and other related expenses, channel promotion costs, sponsorship fees for our esports teams as well as expenses for offline and online events. In the Q4 of 2020, sales and marketing expenses, excluding SBC, increased on a sequential basis. This increase was due to more esports tournaments resulting to increased marketing expenses and increased prices for our self organized Esports tournaments. We are quite positive towards 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 believe our user conversion will increase because of the updated features of our platform, and we plan to enhance our channel promotions. Therefore, in the future, the absolute value of our sales and marketing expenses will increase, while as a percentage of our total revenue, sales and marketing expenses will continue to optimize. There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Thank you for joining us today. If you have any further questions, please feel free to contact us or request through our IR website. Thank you and have a good day. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.