Earnings Call: Q2 2020

Aug 10, 2020

Earnings release

Good morning and good evening, ladies and gentlemen. Thank you, and welcome to DU International Holdings Limited Second 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. I'd now like to turn the call over to the first speaker today, Ms. Emma Ma, Investor Relations to Du Yu. Please go ahead, ma'am. Thank you, operator. Hello, everyone. Welcome to our Q2 2020 earnings call. Joining us today are Mr. Shao Jie Chen, Chairman and CEO Ms. Moming Su, Chairman Strategy Officer and Mr. Hao Cao, Vice President of Finance. You can refer to our Q2 of 2020 financial results on our IR website at ir.douyu.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 provisions for the Private Securities Litigation Reform Act of 1995. These forward looking statements are based on management's current expectations and observations that involve no 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. Now, I will speak on behalf of our Chairman and CEO, Mr. Shao Jie Chen. This evening, we issued a press release, which was furnished to the Securities and Exchange Commission under the firm 5 ks reporting that we have received a non bidding proposal letter from Tencent Holdings Limited. You can send the release in the Investor Relations section of our IR website at ir. Douyu.com. According to the proposal letter, Tencent proposed Douyu and Huya Inc. To enter into a stock for stock merger to be effective pursuant to applicable laws. As a result of which, Huya, our subsidiary, would acquire each outstanding ordinary share of Douyu, including ordinary shares represented by American Depository Shares in exchange for to be a great number of newly issued Class A ordinary shares of Huya. The Board have just received the letter and no decision has been made of any kind with respect to the proposal transaction. Our Board will continue to assess the transaction. There is no assurance that any definitive offer will be made, that any agreement will be executed or that this or any other transaction will be approved or consolidated. The company does not undertake any obligation to provide any update with respect of this or any other transaction, except as required under applicable law. Additional information will be provided if and when appropriate. Now, I will turn back to our Q2 performance. We concluded the Q2 of 2020 with solid financial and operational results as both our total net revenue and profitability reached record high. In the period, total net revenues increased by 33.9% year over year to RMB2.51 billion. Additionally, gross profit increased by 73.7% year over year to RMB522.9 million, while gross margin expanded to 20.8 percent. Meanwhile, net income was RMB319.3 million, representing a net margin of 12.7%. Non GAAP net income increased to RMB322.9 million, representing a non GAAP net margin of 12.9 percent. And ARPU increased by 19.7% year over year to RMB306. Although the reduction of people's regular work and school schedules led to a short term pressure on our user traffic growth, Our average mobile MAU count maintained its rapid growth trajectory in the 2nd quarter, increasing by 15.4% year over year to 58,400,000. This steady improvement in operational results was mainly due to our promotion of new game live streaming content. Our collaboration with celebrities and cultivation of streamers with high growth potential, as well as our production of superior A sports centric live streaming content and events. Since our company's inception, we have firmly believed that high quality game live streaming content is a fundamental growth driver for both user retention and user engagement. As such, we maintained our commitment to augmenting our user value proposition in the quarter by enriching our e sports content and expanding our non game segment content offering. In the quarter, for example, we continue to broadcast and produce popular e sports tournaments and deepen our collaboration with leading Esports streamers. Such efforts help to grow our supply of premium Esports content and thus to further bolster our industry leadership. In addition, through our exploration of different non game content segments, we witnessed the user traffic growth of both our food and live content categories accelerated in the period. Our expansion both upstream and downstream, the Esports value chain also yielded ample results during the quarter. For example, 2 of our sponsored Esports teams won high profile tournaments, including League of Legends, TS as a mid season Invitational 2020 and PUBG L Star as a PCL Spring 2020. This type of dynamic Ace 4 team partnership are providing us with the necessary food to further amplify our brand presence, supercharge our content leadership and establish our platform as the go to destination for watching superior baseball content in real time. On the gaming front, we successfully broadcasted more than 50 large scale baseball tournaments as we continue to deepen our collaboration with leading game developers game publishers such as Tencent in this quarter. For our broadcast of KPL, we worked hand in hand with the owner of King's project team to develop a new 12 month plus platform streamer commentary broadcast model. This innovative model enable users to enter into the live streaming room of their favorite platform streamers to watch streamers convert and listen to their commentary during the event, which proved to be quite appealing in the period, helping us to further enhance our platform stickiness and streamer user relationship in turn. Beyond our tournament broadcast, we also produced more than 50 Esports tournaments internally and through collaboration with external partners in this quarter. Our in house production of Douyu Golden Grand Tournament, Season 9, for example, upheld its tradition of excellence as it generated significant user traffic for our game segment and helped to ramp up our user engagement on our platform during the event. Going forward, we plan to accelerate our growth trajectory by implementing a 3 pronged content strategy. 1st and foremost, we will continue to generate high quality A four content, including e sports related game videos and tournament centric content through in house production and joint development with external partners. In addition, we plan to actively deploy and which emerge from new blockbuster game launches, deepen our market penetration and accelerate our mobile user growth and conversion. On the monetization front, we continue to refine our event model and interactive features to better corporate user paying habits and augment our monetization capabilities during the Q2. We also focus on refining our operating tactics for each of our content segments, especially our game segment to steadily improve each segment's monetization efficiency. As a result, our quarterly paying users increased by 13.4% year over year to 7,600,000 in the Q2, implying a paying ratio of 4.6% as compared to 4.1% in the peer year period. Moreover, ARPU also increased by 19.7% year over year to RMB306 in the 2nd quarter. At the same time, revenue contribution from mid tier streamers on our platform grew a sequential basis for the Q1 in a row, further updating the strength of our mid tier streamer. Going forward, we plan to maintain our focus on the exploration of new interactive product features and event models to enhance our platform's overall operating efficiency. We also aim to further refine the operating efficiency of each content segment, which should help to upgrade monetization capabilities of each segment and live streaming room in turn. On the globalization front, we continue to invest in Japan to expand our market share and accelerate the growth trajectory of our Japanese live streaming platform, Meldong. In the period, Japanese user continued to be highly attracted by Meldong's vibrant game live streaming ecosystem with the platform ranking among the top Japanese game live streaming platform in terms of mobile downloads, user base and user engagement. According to Beam Consulting, in summary, we maintained our rapid growth trajectory to deliver solid financial and operational achievements in the Q2 of 2020. Going forward, we plan to continue deploying resources up and down the Esports industry value chain, while ramping up our R and D and operations investments to further optimize our user experience and to evaluate our Esports centric live streaming community. We also aim to further refine our product development cycle streamer management team system and content operation strategy to operate our monetization and operating efficiencies. We remain confident in our ability to consistently enhance our financial performance, deliver lasting shareholder value and spearhead the development of the game live streaming industry in China over the long term. 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, Emma. Hello, everyone. I'm pleased to announce that our total revenues in the Q2 of 2020 continues to grow, increasing by 33.9 percent to RMB2.51 billion from RMB1.87 billion in the same period of 2019 and exceeding the high end of our previous guidance range. In addition, during the Q2 of 2020, gross margin expanded to 20.8% from 16.1% in the same period of 2019. Net income increased to RMB319.3 million from 23,200,000 in the same period of 2019. And adjusted net income increased to RMB 322,900,000 from RMB52,600,000 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 Q2 of 2020 increased by 33.9% year over year to RMB2.51 billion with RMB2.32 billion in live streaming revenues and RMB188.3 million in advertising and other revenues. Live streaming revenues in the Q2 of 2020 increased by 35.8 percent to RMB2.32 billion from RMB1.71 1,710,000,000 in the same period of 2019. This increase was primarily attributable to the optimization of our platform's interactive features as well as our continuous requirement of event mechanism, both of which help to further cultivate user paying habits. These initiatives helped to increase both user streamer interactions and user payment frequencies on platform, especially for our game segment. As a result, our paying users in the Q2 of 2020 increased by 13.4% to RMB7.6 million from RMB6.7 million in the same period of last year. Advertising and other revenues in the Q2 of 2020 increased by 14.6 percent to RMB188.3 million from RMB164.4 million in the same period of 2019. This increase was mainly driven by the ongoing growth of our brand recognition and the corresponding increase in demand of integrated streamers promotion advertising form. Cost of revenues in the Q2 of 2020 increased by 26.3 percent to RMB1.99 billion from RMB1.57 billion in the same period of 2019. More specifically, revenue share fees and content costs in the Q2 of 2020 increased by 32.3 percent to RMB1.75 billion from RMB1.33 billion in the same period of 2019. The increase in revenue share fees and the content costs can be generally be explained by the following drivers. During the quarter, our revenue share fees increased, which was largely in line with the increases in total net revenues. Additionally, we also enriched our platform's e sports related content, while continuing to advance our expansion initiatives in Japan. Furthermore, we increased our investment in tournament related videos and in house content production. Family cost in the Q2 of 2020 increased by 9.8% to RMB168.4 million from RMB153.3 million in the same period of 2019. The increases to bandwidth costs were mainly driven by increases in mobile user growth and total user engagement as well as our ongoing efforts to improve the viewing experience of our users. Gross profit in the Q2 of 2020 increased by 73.7 percent to RMB522.9 million from RMB301.1 million in the same period of 2019. Gross margin in the Q2 of 2020 expanded to 20.8 percent from 16.1% in the same period of 2019. Such expansion was mainly driven by our monetization capabilities as well as our increased economies of scale. Now turning to our operating expenses. Sales and marketing expenses in the Q2 of 2020 decreased by 15.3% to RMB142.1 million from RMB167.8 million in the same period of 2019, mainly due to the decrease in marketing expenses related to the postponement of large scale offline events as a result of COVID-nineteen and related safety concerns. Research and development expenses in the Q2 of 2020 increased by 12.5 percent to RMB94.9 million from RMB84.4 million in the same period of 2019. This increase was primarily due to the increased investment in technological innovations as well as higher share based compensation to related employees. General and administrative expenses in the Q2 of 2020 increased by 8.4% to RMB79.5 million compared to RMB73.3 million in the same period of 2019, mainly as a result of higher professional service fees related to the requirements of being a publicly listed company on the NASDAQ. The amount of share based compensation expenses allocated to operating expenses in the Q2 of 2020 was RMB33.9 million compared to RMB27.4 million in the Q2 of 2019 and RMB41.9 million in the Q1 of 2020. Other operating income net in the Q2 of 2020 was RMB32.5 million compared with RMB14.5 million in the same period of 2019. Adjusted operating income in the Q2 of 2020, which excludes share based compensation expenses increased to RMB272.7 million compared to RMB 17,400,000 in the same period of 2019. Net income in the Q2 of 2020 improved to RMB319 point 3,000,000 from RMB23.2 million in the same period of 2019. Adjusted net income in the Q2 of 2020, which excludes share based compensation expenses, share loss in equity method investments and impairment loss of investments improved to RMB322.9 million from RMB52.6 million in the same period of 2019, implying an adjusted net margin of 12.9% for the Q2 of 2020. For the Q2 of 2020, basic and diluted net income per ADS were RMB1.06 and RMB1.02 respectively, while adjusted basic and diluted net income per ADS were RMB1.07 and RMB1.07 respectively. Looking ahead, we remain focused on improving our monetization capabilities and operating efficiencies, while also implementing the investment to continue upgrading our user experience, diversifying our platform offerings and expanding our market share. We expect our total net revenues for the Q3 of 2020 to be in the range of RMB2.64 billion to RMB2.68 billion. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions. First question comes from Li Zhang, Bank of America. Please go ahead. My first question is regarding the M and A proposal announced today earlier. If I may, could management share with us your view on this? And secondly, can you give us an update on your current collaboration with Tencent in game earlier? What are the major ways of projects we have with Tencent now? And do we expect any further synergy or change in the future? Thank you. Thanks for your question. I will have to translate. So as discussed, our Board has now had a chance to review and evaluate the proposal later in detail or to make any decision on the proposed transaction. So please refer to our press release and the SEC filing for the details, which is related to the transaction. In terms of the second question, as we can see, the game live streaming is an important part in Tencent's strategy. This is good for our development actually going forward. So we have also maintained a close collaboration relationship with the live streaming middle office and multiple project team of Tencent. So at the early stage of the multiple exploration with Tencent's mid office regarding potential initiatives. Currently, we are discussing the implementation of initiatives including such as the data change and also the buying of platform engine portals inside of games with our major shareholder Tencent. So we believe this will significant help to improve our mobile traffic and also market penetration rate maybe in the future. So thank you. So operator, please address the next question. Thank you. The next question comes from Wangain Zhang of Citigroup. Please go ahead. Thanks, management, for taking my question. So the question is regarding MAU. So after the resumption of working at school, we still see sequential MAU growth on both PC and the mobile end. So from our internal data, do we see any change in user behavior? Thank you. Thanks for your question. I will have to translate. Actually, our user behavior is basically consistent with the trend over the past few quarters, which shows our high user segment. And in the Q2, the average net month active user retention rate actually remains above 75%, which was stable compared to the previous quarter. Meanwhile, our user behavior data also shows that with the increasing number of years user spend on our platform, the average monthly time spend also increased. This growth curve remains consistent across users who join us at different times and we have gradually become high quality and also the loyal clients of our platform and there have been not any changes, which is compared to the last few quarters. So operator, we can address to the next question. Thank you. The next question comes from Thomas Chong of Jefferies. Please go ahead. Thanks management for taking my questions and congratulations on a very solid set of results. My question is about the Q2 revenue, in particular the live streaming revenue. What are the key factors which drive the revenue growth? Thank you. Yes. Thank you for your question. I will help translate. Actually, in the second quarter, due to the assumption of work and also growth in platform traffic and the number of paying users actually faced kind of the short term pressure. However, our constant refinement of operation has already developed users' pain habits. Meanwhile, our continuous development and the refinement of platform interactive features and products have enhanced user streamer interactions and increased users' willingness to pay and the paying frequency. So as a result, the number of our total paying users remained stable at 7,600,000 compared to the Q1 of this year and our ARPU also increased by 9.5% quarter on quarter to RMB306. Our refinement of operation across segments help to improve each segment monetization efficiency. In particular, our game segment monetization capabilities continue to improve in this quarter. We also continue to diversify our content to improve the monetization efficiency and the revenue contribution of the non gaming segment. We have also improved the mid tier streamers monetization efficiency through deeper collaboration with the talent agency and also terrorist monetization product. Apart from this, the combination of large scale event and also the deployment of weekly event in the second quarter continue to boost our platform's monetization capabilities and also to improve our total net revenue. So thank you. Operator, please address the next question. Thank you. The next question is from Alex Poon of Morgan Stanley. Please go ahead. I'll translate my question. My first question is regarding your streamer recruitment situation, especially for new games, Brawl Stars and DNF mobile coming soon. Can you share with us what's your strategy to acquire to recruit these top streamers for new games? Thank you. Thanks for the question. I will have to translate. In terms of new game titles, will you recruit streamers in kind of 2 ways. The first way, we discover and encourage streamers with high growth potential from the similar type of games to stream the new game titles. This help us generate high quality content and can attract new users to our pamper. We also recruit a large amount of streamers by collaborating with the top game talent agency to ensure the quantity and also the quality of new game related content. Actually, on top of this, we keep monitoring the streamers' performance in the new segment and also provide the high quality streamers with resources on our platform to help them become the top or mid tier broadcasters. The large number of premium streamer and indeed partnership with industry leading game talent agencies enable us to maintain our leadership in promoting and distributing the new game titles. Because of the advantage mentioned above, we were able to keep a leading position in key metrics such as total views and also the user engagement of growth staff and other new game titles. Going forward, we actually will continue to leverage our strength to maintain our leader edge in the operation of new titles such as D and F Mobile. So operator, please address the next question. Thank you. The next question comes from Daniel Chen of JPMorgan. Please go ahead. I will translate myself. Thanks, management, and congrats on a very strong quarter. My question is, firstly, on the content side. What kind of plan do we have on the content diversification? And what's the future strategy in the content in both e sport and non e sport? The second one is that are we exploring some new product besides our current live streaming platform? And also what's our future strategy in some non live streaming monetization model? Thank you. So thanks for your question. I will help to translate. In terms of our future game content strategy, we will continue to invest in esports such as League of Legends, PUBG, Pop Fire and we will also pay close attention to the new blockbuster game titles and explore a suitable live streaming game throughout the industry verticals. For example, in the Q2, actually we have seen that the new game Broadstar delivered off outstanding results on our platform. Actually, meanwhile, we continue to recruit streamers for different new game segments to maintain a stable supply of high quality content and also attract more users to our platform. We will keep building the Esports content communities and explore more game related areas such as game video. In terms of our non game segment, actually we will continue to enrich the content ecosystem to meet the users' diversified content demand in terms of like the food, live, talent show, outdoor and also the ACG. In terms of the innovation, we have been exploring ways to diversify our revenues. For example, we launched the new business model, the voice chat in October of 2019 and the revenue has grown steadily. The new segment has helped us to further improve our monetization efficiency and also capability. In the mid to long run, we are actively preparing for the deployment of cloud games and expect the cloud game related game distribution and also the advertising business to become our next growth engine when it matures. So, operator, we can address the next question. Thank you. The next question comes from Alex Liu of Chinese Renaissance. Please go ahead. I'll translate myself. Two housekeeping questions here. First, what's the major drivers of bandwidth costs this quarter and how will this trend up in the next few quarters? Also for sales and marketing, the sales and marketing expense was up quite a bit sequentially this quarter. Any color on what's driving that? Thank you. That's your question. I will help to translate. The bandwidth cost increased quarter over quarter because that there are more tournament and higher user engagement in the Q2. In addition, we have always been committed to improving our users' reading experience and that provided the user with the higher quality images and content during the period. We expanded that the bandwidth cost in the second half of twenty twenty to increase slightly quarter over quarter since there will be more intensive tournaments in the third and also the fourth quarter. In terms of your second question, which is related about sales and marketing spend, actually that will include the staff salaries and other related expense, channel promotion costs, online and offline activity expense as well as the sponsor fees to the Esports team. In the Q2 of 2020, the sales and marketing expense increase is mainly due to the tournament related marketing costs as the tournament gradually recovering and also the increasing sponsorship to the influential Esports teams and also the channel promotion expense. As we acquired positive towards the development of the Esports industry in the long run, We'll continue to increase the investment in the Esports related activities and also the Esports team sponsorship. Meanwhile, we will upgrade our product to improve the monetization efficiency and also intend to enhance the channel promotion. Therefore, the absolute value of our sales and marketing expense will increase. But if we look at both as a percentage of the total net revenue and we will continue to decrease. So thanks for the question. Operator, please grab the next question. Thank you. The next question is from Tian Hou of T. H. Capital. Please go ahead. So my question is related to the overseas expansion. In the opening remarks, company management mentioned the success in Japan. So I would like to have some clear color on that, such as MAU, paying the show. And what are the games, are the top games in that Japanese platform? And going forward, company's plan what's the company's plan to put more game are you planning to release in that platform? Thank you. Yes. As we mentioned before on our earnings call that we have already had the investment into Southeast Asia and also Latin America investments, but we have already noted that the users court is not quite good in that kind of area. So actually we have decreased kind of the investment. During the Q2, we continue to enhance our investment in Japanese market. We launched the Meldam, a game live streaming platform in Japan in the late September of 2019 and the development is better than our expectation. According to the Bing consulting, Mail Dome ranked among the top platforms in the Japanese game live streaming market, which is in terms of the mobile app downloads, the user base and also the user engagement. And we think that we will continue to explore the Japanese market and deepen our collaboration with the Japanese partners in terms of the local resources to achieve the better economies of scale. The reason why we think the Japanese market is very important for us is mainly because actually Japan is the 3rd largest gaming market in terms of the market size after North America and China. It has almost doubled spending power compared with South America and also the European countries and gamers are more willing to pay. However, the development of the game live streaming industry in Japan is still at the early stage, so which is not consistent with this large and mature gaming market. So that means there will be a huge potential to develop streaming in the Japanese market. So thank you, operator. This concludes our question and answer session. I'd now like to turn the conference back over to management for any closing remarks. Please go ahead. Yes. Thank you for joining our call. We are looking forward to speaking with everyone next quarter.