Earnings Call: Q3 2020

Nov 11, 2020

Earnings release

Good morning and good evening, ladies and gentlemen. Thank you, and welcome to the Zhou International Holdings Limited's Third Quarter 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. Please note today's event is being recorded. I will now turn the call over to the first speaker today, Ms. Mao Mao, Vice President of Capital Markets of Biyu. Please go ahead, ma'am. Thank you, operator. Hello, everyone. Welcome to our Q1 2020 earnings call. Joining us today are Mr. Shao Jie 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 Q3 of 2020 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 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 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. Now, I will speak on behalf of our Chairman and CEO, Mr. Shao Jian Chen. Overall, our financial and operational results maintained a stable growth rate in the Q3 of 2020, with our total net revenues increasing by 37.0 percent year over year to RMB2.55 billion. We also achieved the 7th consecutive quarter of positive non GAAP net income. At the same time, our average mobile MAU count maintained its robust growth trajectory, increasing by 14.4% year over year to 59,600,000, while our quarterly paying users also grew by 12.7% year over year to 7,900,000 during the quarter. Despite the lingering effect of COVID-nineteen and broader macro uncertainty throughout the country, users continue to flock our e sports centric game live streaming platform for its vibrancy and installment. Our total average MAUs reached 194,000,000 during the Q1 of 2020, which was attributable to 5 factors. 1st, by strengthening our collaborations with Tencent game team, we added more users, especially those users on the PC platform. Also, our broadcast of large scale Esports tournaments such as the LTL 2020 Summer tournament helped expand our user base while engaging those previously inactive users at the same time. In addition, new game launches attracted a wave of brand new users to our platform during the Q3. Besides, the summer holiday boosted students viewership and contributed to the positive seasonality impact. Above all, our continuous refinement of platform operations has enabled us to see opportunities emerging from Esports events and tournaments and helped us to achieve steady growth in all of our operating metrics. For our content ecosystem, we continue to enhance our game centric Esports platform, increase the content breadth and depth in every segment of our platform, develop a variety of innovative content formats and expand our coverage up and down the Esports industry value chain. During the quarter, we achieved superior results in investing high quality Esports team. For example, our sponsored League of Legends teams such as CES, LGD and JVG all advanced to the LPL 2020 Summer Playout Series. Mostly, CES won the LPL 2020 Summer Championship. Moreover, our newly signed PUBG team, DOC emerged as the Dark Horse team of 2020 and won the runner-up place in its inaugural participation in this year's PCL Summer tournament. Meanwhile, we further deepened our collaboration with Tencent and other game developers and publishers and successfully broadcasted more than 50 large scale official Esports tournaments during the quarter. For example, we obtained the exclusive broadcasting rights for Amiga League, which was one of the largest professional championships for DOTA2 in the world, thus further augmenting our platform's brand influence. In addition, we self produced more than 50 high quality Esports tournaments during the period. Most notably, we organized the 10th consecutive production of our proprietary Esports event, Golden Grand Tournament, which has grown into one of the largest RPG tournaments in China. As we continue to innovate our business model, we improved our user experience significantly by launching the beta version 2.0 of cloud games, which has a brand new UI design as well as optimized server functionality and compatibility. Going forward, we plan to explore further into cloud games. Also, as we almost completed the design and development of the mobile application for pre recorded game videos, we were able to rotate pre recorded game broadcast with live stream game content, provide a more diverse supply of content to our platform, expand our coverage of various user scenarios and stimulate our user engagement. On the streamers front, we continue to improve our efficiency in managing and monetizing the mid tier and long tail streamers during the period. We are glad to see that it has become a norm for our partner talent agencies to proactively uncover and groom new streamers. Also revenue contribution from our mid tier and long term streamers have been increasing continuously. In addition, by recruiting the new non game streamers to our platform, we have been able to cover a broader array of user demographics. Looking ahead, we should continue to execute our game content centric growth strategy, engage more game users through diverse content, capture user addition opportunities born out of new game title launches, satisfy a wider range of user viewing demands through segmentation of non game content, proactively floor new business models and invest in those areas along with our long term strategy. In terms of monetization, as we continue to refine and optimize our interactive product functionality, we were able to grow our quarterly paying users by 12.7 percent year over year to 7,900,000 and our paying ratio to 4.1% during the quarter. Meanwhile, our ARPU also increased by 25.2 percent year over year to RMB297. In addition to solidifying our existing users' paying habits, we rolled out additional innovative initiatives to add more paying users and lay a solid foundation for our sustainable growth in both paying users and overall revenue. Looking ahead, we will continue to explore new product functionalities and revenue models, enhance our platform's overall operational efficiency and advance the monetization capabilities for every platform segment or even every live streaming room. At the On the On the research and development front, we continued to invest in our technology development capability during the quarter. With our support for the display functions of the more efficient video compression technology, HEVC, our users can enjoy videos of the same viewing quality with only half of the previously required bandwidth, thus leading to a smoother viewing experience, especially for our mobile users. As we continue to implement the display functionality of Edge 265 across our platform, we foresee more room to optimize our bandwidth costs. In addition, we rolled out the real time playback function at a large scale on our platform. By leveraging AI technology to accurately tag key game moments such as kills and team broth, we enabled our users to play precisely the moment of their choice, thus significantly improving their viewing experience. On the globalization front, we continue to increase in our investment and exploration in the Japanese market. As we made further improvement to the product functionalities and content varieties of our Japanese live streaming platform, Melden, it was able to maintain a steady growth trajectory. In summary, during the quarter, we sustained our continued growth and exploration in our user base expansion and content ecosystem development. Looking ahead, we plan to further build out our game content centric platform, deploy resources both up and downstream the esports industry value chain, bolster our operational performance, ramp up our R and D efforts and optimize our user experience. Furthermore, we remain committed to upgrading our platform monetization capabilities, improving our operating efficiencies and enhancing our financial performance over the long run. On October 12, 2020, we entered into a merger agreement with Huya. We look forward to working together with Huya by providing our users with high quality content and services and creating long term value for our shareholders in the future. 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 Q3. Thank you, Momo. Hello, everyone. During the Q3 of 2020, in response to lower than expected sales performance of certain major planned events, we took decisive action, shifting our attention in the second half of the year to the development of content and acquisition of broadcasting rights for Esports games. In addition, we also maintained our focus on new and innovative ways to further optimize user streamer interactions on our platform. As a result, our total revenues in the Q3 of 2020 increased by 37% to RMB2.55 billion from RMB1.86 billion in the same period of 2019, with live streaming revenues in the same period increasing by 41.3% year over year. Meanwhile, we also improved our net income in the Q3 of 2020 to RMB59.6 million from a net loss of RMB165.4 million in the same period of 2019, while our adjusted net income in the Q3 of 2020 increased by 36.8 percent to RMB98.7 million from RMB72.2 million in the same period of 2019. Now please allow me to provide you with some more details regarding our key financial metrics. Total net revenues in the Q3 of 2020 increased by 37% year over year to RMB 2.55 billion, with RMB 2.35 billion in live streaming revenues and RMB197.8 million in advertising and other revenues. Live streaming revenues in the Q3 of 2020 increased by 41.3 percent to RMB2.35 billion from RMB1.66 billion in the same period of 2019. This increase was primarily attributable to the improved pay habits of our existing users as well as our successful attraction of new paying users, resulting from our continued requirement of event mechanisms. As a result, paying users in the Q3 of 2020 increased by 12.7 percent to 7,900,000 from 7,000,000 in the same period of last year. In addition, improvements made to interactive features also helped to raise our user payment frequency on our platform and drive the growth of our app on a year over year basis. Advertising and other revenues in the Q3 of 2020 increased to RMB197.8 million from RMB190 6,100,000 in the same period of 2019, which was mainly driven by ongoing growth of our brand recognition and the corresponding increase in demand for streamers, integrated advertising and promotion solutions. Cost of revenues in the Q3 of 2020 increased by 41.2 percent to RMB2.18 billion from RMB1.54 billion in the same period of 2019. More specifically, revenue sharing fees and the content costs in the Q3 of 2020 increased by 48.9 percent to RMB 1,950,000,000 from RMB 1,310,000,000 in the same period of 2019. The increase in revenue share of fees and the current costs can generally be explained by the following drivers. 1st, during the quarter, our revenue sharing fees increased, which was mainly due to the increases in live streaming revenues in the same period and increased incentives given to streamers during certain major fan events. 2nd, our content costs increased, which was mainly driven by 3 factors. 1st, we continue to engage with quality streamers abroad to expand our footprint in overseas markets, especially in Japan. 2nd, we continue to focus on enriching our platform's esports related content. And 3, we purchased additional live streaming rights for esports games in the second half of twenty twenty, which was previously delayed in the first half of twenty twenty as a result of the outbreak of COVID-nineteen. Bandwidth costs in the Q3 of 2020 increased by 12.1 percent to RMB169.1 million from RMB150.8 million in the same period of 2019. The increases to bandwidth costs were mainly driven by increases in both mobile user growth and total user engagement, partially offset by the efficiency improvements resulting from technical upgrades. Gross profit in the Q3 of 2020 increased by 16.6 percent to RMB369.4 million from RMB316.8 million in the same period 2019. Gross margin in the Q3 of 2020 was 14.5%, compared to 17% in the same period of 2019. Now turning to our operating expenses. Sales and marketing expenses in the Q3 of 2020 decreased by 7.5 percent to RMB160.3 million from RMB 100 and 73,200,000 in the same period of 2019, mainly due to the decrease in share based compensation expenses recognized in the Q3 of 2019 following our IPO. Research and development expenses in the Q3 of 2020 decreased by 8.6 percent to RMB109.6 million from RMB119.9 million in the same period of 2019. This decrease was primarily due to the decrease in share based compensation expenses recognized in the Q3 of 2019 following an IPO, which was partially offset by the increase in expenditures for the research and development of new products, as well as the increased headcount of overseas research and development personnel during Q3 of 2020. G and R and administrative expenses in the Q3 of 2020 decreased by 59.6 percent to RMB94.2 million from RMB232.9 million in the same period of 2019, mainly as a result of the reduced share based compensation expenses recognized in the Q3 of 2019 following on IPO, which was partially offset by the increase in professional service fees. The amount of service compensation expenses allocated to operating expenses in the Q3 of 2020 was RMB33.2 million compared to RMB28.2 million in the Q3 of 2019 and RMB 33,900,000 in the Q2 of 2020. Our operating income net in the Q3 of 2020 was RMB 32,500,000 compared to RMB 11,800,000 in the same period of 2019. Adjusted operating income in the Q3 of 2020, which excludes share based compensation expenses, increased by 130 0.7 percent to RMB71.2 million from RMB30.8 million in the same period of 2019. Net income in the 3rd quarter of 2020 was RMB59.6 million, compared to a net loss of RMB165.4 million in the same period of 2019. Adjusted net income in the Q3 of 2020, which excludes share based compensation expenses, share loss in equity method investments and impairment loss of investments, improved to RMB98.7 million from RMB72.2 million in the same period of 2019, implying an adjusted net margin of 3.9%. For the Q3 of 2020, basic and diluted net income per ADS were RMB0.27 and RMB0.26 respectively, while adjusted basic and diluted net income per ADS were RMB0.39 and RMB0.39 respectively. As a result of the uncertainties surrounding the current merchant action, which we believe could potentially affect our views on both operational conditions as well as the market, we will not provide guidance for the Q4 of 2020. As we advance throughout the remainder of 2020 and beyond, we remain committed to improving our monetization capabilities and operating efficiencies. At the same time, we also plan to continue upgrading our user experience, diversifying our platform offerings and building the growth of our international initiatives to capture additional market share in selected overseas markets. 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. And today's first question comes from Daniel Chen with JPMorgan. Please go ahead. I have a housekeeping question on the merger deal with Huya. So how do Douyu and Huya arrive at the 10 Douyuan ADS in exchange for 7.3 ADS of Huya? And what are the major process in the future for the merger deal and which we think we received on the financial release that will happen in the first half of twenty twenty one? Thank you. I'll translate the response to English. Regarding the question on the merger, both Huya and Zhou Yu have established their own committee composed of independent directors and with assistance of financial advisors and legal counsel, both special committees conducted due diligence on their respective companies, accounting, tax, business operations, legal and other relevant matters and carefully evaluated the financial forecast and evaluation and engaged in the negotiation of merger agreement on behalf of their respective companies. So on this basis, both companies' independent financial advisors have provided a special committee with their opinion on the share exchange ratio. And based on the special committee's recommendation, both Huya and our Board of Directors approved the merger agreement. Regarding the key next steps, a few hours ago, Huya has filed a Form F-four with the SEC and is currently waiting for review and approval, which is a form for foreign issuers in relation to M and A transaction. It serves as a registration statement for Huya's newly issued stock, which also include a proxy statement for Douyu to solicit votes from its own shareholders at the upcoming shareholder meeting. So Form F-four also contain other crucial information related to the merger. And in the meantime, we have submitted a Form 13e3 to the SEC for its approval, which is an application form for the listing and privatization. After getting SEC approval on F4, we will hold an extraordinary general meeting to vote on this merger. And once the number of votes for the merger, please choose 3rd of those votes presented at the meeting, the merger will be considered approved by our shareholders. And regarding the timetable, we don't have a definitive timetable yet, but all parties are working towards finish or close the transaction. Thank you. Our next question today comes from Alex Liu with China Renaissance. Please go ahead. So first question regarding the proposed merge, could you share with us where are we going to see the synergies on both revenue and cost side going forward? And the second question is that I noticed our bandwidth cost is up slightly sequentially this quarter. What are the main reasons? And how should we think about this item in the longer term? Thank you. I will translate for Mr. Chen. So due to the fact that the merger has yet to close, we have not reached a conclusion on the potential synergies effect we could achieve on the merger and neither have we quantified these synergies. But from a higher level, we believe there are a number of areas that we should look for the synergies. First of all, users and revenues, we believe the content of mobile and PC games from respective platforms are complementary to each other and the merger should result in more comprehensive content coverage to further improve the depth and breadth of the consolidated content ecosystem to further boost user traffic and user engagement. And secondly, from cost perspective, we think the merger will create a better economy of scale on the common cost, for example, streamers' funding performance. And certainly, we think there could be further synergies to be achieved from other operating expenses such as G and A, R and D and IT infrastructure expenses. And in the future, we believe that both platforms love Penguin will be able to leverage their respective leading advantages on gaming content and strengthen our joint cooperation and to develop more innovative user interactions, content formats and monetization method. Regarding your question on the reason we are seeing a decreasing trend on the bandwidth cost sorry, increasing trend on the bandwidth cost on quarter over quarter basis. In the Q3, bandwidth cost increased slightly due to the fact that we have seen increased user traffic and higher user engagement, as well as more intensive tournaments during the period. But this increase was partially offset by our video coding technology, which helped us to achieve more efficient bandwidth usage in the quarter. And we expect the bandwidth cost in Q4 of 2020 to increase slightly on a sequential basis due to more Esports tournaments during that period. Thank you. Thank you. Our next question today comes from Lei Zhang with Bank of America Securities. Please go ahead. Thanks management for taking my question. My first question is about the competitive landscape. Could you share with us your update on the competitive dynamics in recent quarters? And do you see any change in game streaming industry after our merger with Huya? Secondly, we noticed that some of our shop video peers are also doing like a shop video and e commerce streaming. So can you share with us some updates on your game video and e commerce live streaming business? And another housekeeping question on OpEx. What are the main reason of the increase of OpEx in the Q3? And should we look at the OpEx in next 1 or 2 quarters? Thank you. Okay. I will translate for the response to the first question. Regarding the competitive landscape, we have not seen significant change since last quarter we see. As a leading game live stream platform, we continue to build our game centric content ecosystem and energize our e sports community and for other user segment such as developing short form gaming videos. Since short form video platforms enter the game live streaming space, overall we've seen both user traffic and customer diversification to increase accordingly, which has also helped to raise the ceiling of the entire game live streaming market and further accelerated the development of the industry. And from the competition perspective, we believe in the short run, the industry competition will mainly revolve around the refinement of marketing efforts, the diversification of high quality content and the innovation of monetization value. In the long run, we expect the competition to focus on more rapid product upgrades and innovation of content forms such as video and entertainment content and the establishment of social communities that are with health and health such as e sports community and the further integration of the resources both up and down the 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 the build up of talent agencies as well as cultivation of the professional e sports content ecosystem. Now we have created a stronger content barrier and as a result, we have clear leading advantage in attracting and maintaining those core game users. So looking forward, we believe with the rate ceiling of the entire industry, we will have more advantage of the above mentioned content and value chain strength to further expand our user coverage and the traffic. And lastly, 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 Regarding the second question on the short videos and e commerce business, So, we believe that the pre recorded screen videos including short videos as a content carrier is more suitable for Payback. It's also more inconvenient for the users to share and forward on the social platforms, which in turn will help us to obtain more users and increase the user traffic. As of the Q3, we had essentially completed the design and development of our application for pre recorded game videos. Through this application, we are able to provide our users with an organic combination of rotating the pre recorded game broadcast and the live streaming content, offering a more diverse supply of content to our platform, expanding the coverage of various user channels and ultimately stimulating our user engagement. And speaking of our e commerce business, we are positioned as a supplement component to our live streaming business and considering the unique user profile on our platform, which mainly consists of young male users, we believe that games and sports related products are more suitable for our e commerce live streaming. And in the short run, our main goal will be to utilize our ecommercelivestreaming business model to further diversify our content and increase the streamers' income. Thank you. Our next question today comes from Billy Leung. Before we pick up next one. Regarding the change on digital operating expenses, first of all, sales and marketing expense including SBC, meaning includes the staff salaries and other related expense, channel promotion costs, sponsorship fees for our info team as well as expenses for the online and offline events. In the Q3 this year, the sales and marketing expense, including SBC increased on a sequential basis, mainly due to our increased marketing efforts for the e sports tournament, resulting from the increase in the in sports tournament frequency as compared to the prior quarter. It was also due to our increased investments into those in sports teams with no small market interest. We are quite positive about the long term development of the in sports industry and we will continue to invest in in sports related events and in sports team sponsorship going forward. Meanwhile, we will also consistently upgrade our product features to improve our user conversion and we will also enhance our content promotion. In the future, we expect the absolute value of our and marketing expense to increase, while as a percentage of total revenue to continue to improve. Speaking of G and A, for the Q3 of 2020, G and A excluding SBC increased on a sequential basis, mainly due to higher professional service fees resulting from the merger. And going forward, we believe the G and A spend will grow at a slow and steady rate with higher operating leverage. We expect the G and A spend as a percentage of the revenue to further decrease. And lastly on the R and D cost, in the Q3, R and D excluding SBC increased quarter over quarter mainly because the increase in expenditures for the research and the development of new products to maintain the leading position of our technology and products in the industry, as well as the increased headcount for the overseas R and D personnel. And the staff salaries accounted for more than 80% of our total R and D expense. Going forward, although we will continue to invest in our R and D development now to maintain our industry leadership, we think our overall R and D expense will grow steadily and with the rapid revenue growth, we expect our R and D cost as a percentage of the revenue to further increase. Thank you. Next one please. Thank you. Our next question comes from Billy Leung with Haitong International. Please go ahead. Thank you management for taking my questions. I have two questions. The first question is related to the recent LOL Grand Finals competition. So from our perspective, has the has been in for events been bringing a lot of traffic and users to our platforms? And the second question is related to our cloud gaming. Can management share some color in terms of how our cloud gaming has been developing? Thank you. Regarding S10, we all know that the League of Legends World Championship as the brand official event for LLL has always been attracting great number of users, especially this year given many large scale offline events have been delayed or canceled due to COVID-nineteen making S10 one of the really remaining global Esports events of the year. Besides being held in Shanghai also helped it to attract a large audience domestically and attention over the Internet. The LOL has always been a premium content segment for Douyu. We have many wellness streamers and a multiple layer streamer and content supply system. We also signed many famous LL in store teams at home and abroad, including LJD, JDG, TS and the champion team CWG. And these advantages helped the LL segment to reach historical highs in many operating matrix during the championship, making Douyu the first choice for audience and attract high quality user traffic on our platform. Regarding the cloud gaming, we believe that the cloud gaming industry chain and rated infrastructure explore in cloud gaming this quarter. For example, we launched the beta version 2.0 of cloud gaming this quarter. The updated version has a brand new UI design and supports over 200 games to date. We also optimized the server functionality and compatibility, reduced the queuing time and delay, which helps to further upgrade our users overall gaming experience. In addition, we also explored the application for the cloud game, cloud live streaming user scenarios with gaming developers and publishers. In the future, we aim at creating new business models by helping users experience games directly or compete with other players from direct different live streaming room. Thank you. Thank you. Our next question today comes from Thomas Chong with Jefferies. Please go ahead. Thanks management for taking my questions. My question is about our content strategy in the next couple of years as well as the growth driver in Q3 revenue as well as what are the key factors in driving the revenue growth in future? Thank you. On the content strategy, first of all, we through content enrichment. And secondly, game will continue to be our key content segment. Apart from our advantages in the existing game content, we also pay close attention to the new blockbuster game for other vertical games suitable for live streaming and create esports related content, events and programs. For example, in the Q3, we noticed a number of new game titles delivered stronger trends on our platform. Meanwhile, we continue to recruit new streamers for different game titles to maintain a steady supply of high quality content and attract more users to our platform. And at the same time, we will continue to enrich our main game content in areas like live talent show, outdoor and ACG, which will help us to better meet our users' diversified needs. On the revenue growth trend in the 3rd quarter, our revenues from the routine spend events continued to grow steadily. Although the events at the end of the quarter did not meet our internal expectations, we continue to optimize and improve our interactive product function while cultivating the paying habits of existing users and actively acquiring new paying users. And as a result, our live streaming revenues in the Q1 continued to grow on both year over year and quarter over quarter basis. Meanwhile, our paying users increased by 4.5% quarter over quarter to RMB7.9 million from RMB7.6 million in the previous quarter. And secondly, our refinement of operations across different segments have to improve each segment monetization efficiency. We also continue to diversify our content to improve the monetization efficiency and revenue contribution from our non gaming segment. And we also further improved the monetization efficiency of our mid tier streamers through a deeper collaboration with talent agencies as well as tailored monetization products. And on the advertising revenue, the quarter over quarter increase was mainly attributable to increase in streamers promotion app. At the same time, the launch of new game titles such as Yuan Shen and Wangfu, Jixin have further increased the game advertising revenue. And we expect the brand advertising revenue to increase in the 4th quarter as a result of increasing brand branding activities during that period, including those that will take place during the Double 11 shopping cycle. Thank you. This concludes the question and answer session. I'd like to turn the conference back over to the management team for any follow remarks. Thank you all for joining us today. If you have any further questions, please feel free to contact us through our IR site. Thank you and have a good day. Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful