DouYu International Holdings Limited (DOYU)

Earnings Call: Q1 2020

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May 26, 2020

Good morning and good evening, ladies and gentlemen. Thank you, and welcome to Daoyu International Holdings Limited's First 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 this event is being recorded. I will now turn the call over to the first speaker today, Ms. Emma Ma, Investor Relations of Baoyu. Please go ahead, ma'am. Thank you, operator. Hello, everyone. Welcome to our Q1 2020 earnings conference call. Joining us today are Mr. Shao Jie Chen, Chairman and CEO Mr. Mingming Su, Chief Strategy Officer and Mr. Hao Cao, Vice President of Finance. You can refer to our Q1 of 2020 financial results on our IR website at ir. Douyu.com. You can also check a replay of this call where 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 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. Now, I will speak on behalf of our Chairman and CEO, Ms. Shaojie Chen. We concluded the Q1 of 2020 with solid financial and operational results. During the period, total net revenue increased by 53% year over year to RMB2.28 billion. Gross profit increased by 139.2 percent year over year to RMB485.9 million, while gross margin expanded to 21.3%. Meanwhile, net income was RMB254.5 million, representing a net margin of 11.2 percent. Adjusted net income grew to RMB296.9 million, representing an adjusted net margin of 13%. Additionally, quarterly paying users increased by 26.2 percent year over year to 7,600,000. In the Q1, our mobile user base maintained a rapid growth trajectory with our average mobile MAUs increasing by 15.3% year over year to 56,600,000. Although the first quarter is a traditional slow season for us and the coronavirus outbreak caused a certain amount of uncertainty in the marketplace, we're able to continue growing our mobile MAUs through effective measures. During the period, for example, we broadcasted more new top tier games, develop more premium e sports content, enhance our collaboration with game developers and attract more high quality streamers with growth potential. We also implemented more productive streamer guidelines, which helped to augment total live streaming hours. This positive trend were offset by the temporary closure of Internet Cafe during the pandemic, which caused our PC MAUs to decrease in the 4th quarter. While the condition of these factors led to a slight decline in our total average total MAUs, which were RMB158,100,000 in the 4th quarter, compared to RMB 159,200,000 in the same period of 2019. Coming to the Q2, we have been able to maintain our growth momentum in mobile and in use as we continue to refine our platform operation. Going forward, the mobile market will continue to be a strategic focus for user growth as we believe that it still has a tremendous growth potential. We plan to keep enhancing our e sports live streaming capabilities, upgrading our community based content operation and expanding our content offering beyond live streaming, so that we can further deepen our penetration of the mobile market and sustain the rapid growth of mobile users. Underneath our user base expansion lies the solid foundation of our comprehensive content ecosystem. During the quarter, we continued to invest in high quality e sports centric content. At the same time, we also refined our operations to develop new content and maximize content value. As a result, we are able to maintain high levels of user engagement and the user stickiness on our platform. With our game live streaming segment accounting for about 8% of our total viewership during the quarter. Beyond internal content operations, our further exploration of value creation opportunities up and down the e sports value chain also yielded promising results. In the quarter, top e sports teams continue to play a very important role in our content ecosystem. For example, League of Legends, JDG and e sports teams that we sponsored won the LPL Spring 2020. We also built up Honor of Kings' BYG, who ranked the 2nd in the Western division of the KPL Spring 2020. This top e sport team delivered outstanding performance and help to contribute additional premium e sports content to our platform in the quarter. We also continue to deepen our collaboration with game developers and publishers, especially in terms of online Esports tournaments and our related partnerships. During the quarter, we broadcasted over 50 large scale Esports tournaments, including LPL Spring 2020 and KPL Spring 2020. At the same time, we also produced over 40 Esports tournaments through either in house production or joint development with external partners. Notably, we collaborated closely with honor of teams, Jack King and to join participation from both streamers and users. We're able to significantly boost our user participation rate, streamer engagement levels as well as streamer user interaction. These efforts have helped us create additional value along the Esports value chain, which energize our Esports community and will also contribute to our exploration of potential Esports business model in the future. Further solidify our content ecosystem, we continue to utilize our dual streamer management model of combined direct management of top streamers and joint management of mid tier long tail streamers with talent agencies, especially on the live streaming of new game titles front. We are able to quickly establish a high quality content system by leveraging our own business know how and employing a combination of channeling high quality streamers to the new game segments and recruiting new streamers through the partnerships with the talent agencies. As a result, we are able to augment our industry leadership in the live streaming of new games. Building of our extensive user base and leading content ecosystem, we mobilized 3 key drivers to accelerate our revenue growth in the quarter. First, we continue to refine and upgrade our interactive features to stimulate user stream engagement, cultivate user paying habits and increase total tipping revenue. 2nd, we deepened our collaboration with talent agencies to increase our monetization efficiency and solidify our supply of high quality streamers, who have favorable monetization characteristics and help to attract a broader range of users. 3rd, we further developed our transaction driven event system through which we are building a methodical, consistent user monetization process. As a result, our quarterly paying users increased by 26.2 percent year over year to 7,600,000 implying a paying ratio of 4.8% compared to 3.8% in the prior year period. Also, ARPU increased by 23.7% year over year to RMB280 in the Q1. In addition, as we refine our operating tactics tailored for each content segment, both our monetization rate and the mid tier streamers income improved noticeably. Going forward, we plan to explore new user features and functionalities and devise innovative marketing initiatives to bolster the overall operating efficiency of our platform. We also deepen our collaboration with both streamers and talent agencies, enhanced our operations and improved our monetization rates across all segments. During the quarter, to augment our content monitoring efficiency, committed additional results to the research and development of our AI processing capabilities. By leveraging this state of the art technology, we can automatically slide pieces of the copyrighted music, movies, events and other content in advance, thus significantly improving both the speed and the currency of our content monitoring process. For cloud gaming, we continue to explore new methods of improving users gaming experience. For example, we reached an initial cooperative agreement with a number of game developers in the quarter to add the beta version of new games directly onto our platform that enable users to try out new games without the need to download any additional application. As we provided user with convenient gaming experience, we're able to increase our user stickiness and boost our platform traffic. Going forward, we will remain focused on accelerating the development of our cloud games, improve our advertising efficacy and exploring new games distribution model. Adding to our domestic success in China, we maintained the rapid growth trajectory of our Japanese live streaming platform, Meldong, to further solidify our presence in Japan. Considering Japan's broad base of gamers and excellent user payment habits, we are quite optimistic about our prospect of generating a sizable return on investment in the Japanese market. In summary, we're pleased with our financial and operational achievement in the Q1. Looking ahead, we will continue to build an e sports entry content community for younger generation, deploy resources upstream and downstream throughout the e sports value chain, enhance our operational refinement and R and D investments and optimize our user experience continuously. We also seek to improve our platform monetization and operational efficiency through effective product development, streamer management and content operations. As a complement of Webroot's Esports centric content ecosystem, we are confident that we should be able to sustain our platform growth, improve our financial performance and deliver lasting volume to our shareholders over the long term. With that, I will now turn the call to our Vice President of Finance, Mr. Cao Cao to go through the detail of our financial performance in the Q1. Thank you, Emma. Hello, everyone. I'm very excited to announce that our total revenues in the Q1 of 2020 increased by 53% to RMB2.28 billion from RMB1.49 billion in the same period of 2019, exceeding the high end of our previous guidance range. In addition, during the Q1 of 2020, gross margin expanded to 21.3 percent from 13.6 percent in the same period 2019. Net income increased to RMB254.5 million from RMB18.2 million in the same period of 2019 and adjusted net income increased to RMB296.9 million from RMB 35,300,000 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 Q1 of 2020 increased by 53 percent year over year to RMB2.28 billion, with RMB2.11 billion in live streaming revenues, as well as RMB165 1,000,000 in advertising and other revenues. Live streaming revenues in the Q1 of 2020 increased by 56% to RMB2.11 2.11 billion from RMB 1.35 billion in the same period of 2019. This increase was attributable to our ongoing optimization of interactive platform features, which help to further increase user streamer interactions as well as stimulate both the users' willingness to pay and payment frequency. As a result, our paying users in the Q1 of 2020 increased by 26.2 percent to 7,600,000 from 6,000,000 in the same period of last year. In addition, our continuous refinement of talent agency partnerships and event mechanisms has further boosted revenue contribution from our platform's daily operations. Furthermore, the implementation of our operational refinement strategy for different segments also helped to improve our monetization efficiency across both gaming and non gaming segments and further increased media streamers' income. Advertising and other revenues in the Q1 of 2020 increased by 22.2% to RMB165 1,000,000 from RMB135 1,000,000 in the same period of 2019. This increase was mainly driven by our broadening brand awareness and the corresponding increase in demand from game advertisers. Cost of revenues in the Q1 of 2020 increased by 39.4 percent to RMB1.79 billion from RMB1.29 billion in the same period of 2019. More specifically, revenue sharing fees and content costs in the Q1 of 2020 increased by 47.5 percent to RMB1.5 7,000,000,000 from RMB1.07 billion in the same period of 2019. This increase was primarily explained by 2 factors. 1st, increased revenue share fees, which basically grew in line with the increases in total net revenues second, increased investments in both Itbox related content rights and in house content production. In addition, due to a lower unit purchase price and improved bandwidth utilization efficiency resulting from the further implementation of our self developed P2P and CN technologies, our bandwidth cost during the Q1 of 2020 decreased slightly by 5.8 percent to RMB152.9 million from RMB162.3 point 3 million in the same period of 2019. Gross profit in the Q1 of 2020 increased by 139.2 percent to RMB485.9 million from RMB203.1 million in the same period of 2019. Gross margin in the Q1 of 2020 expanded to 21.3% from 13.6% in the same period of 2019. Such expansion was mainly driven by our continuous improvements to monetization, streamer costs and bandwidth utilization efficiency, as well as our improved operating leverage as a result of the company's increasing economies of scale. Now turning to our operating expenses. Sales and marketing expenses in the Q1 of 2020 decreased by 13.1 percent to RMB107.1 million from RMB120 3,600,000 in the same period of 2019, mainly due to the exemption of government mandated social security contribution and the reduced office, travel and welfare expenses during the work from home period after COVID-nineteen outbreak. Research and development expenses in the Q1 of 2020 increased by 17% to RMB92.9 million from RMB79.4 million in the same period of 2019. This increase was primarily driven by increased investment in technological innovations, as well as higher share based compensation to relevant employees, partially offset by exemption of government mandated social security contribution and reduced office, travel and worker expenses during the work from home period after COVID-nineteen outbreak. General and administrative expenses in the Q1 of 2020 increased by 33.3 percent to RMB84.6 million, compared with RMB63.5 million in the same period of 2019, mainly as a result of higher share based compensation expenses, partially offset by exemption of government mandated social security contribution and reduced office, travel and welfare expenses during the work from home period after COVID-nineteen outbreak. Share based compensation expenses allocated to operating expenses in the Q1 of 2020 were RMB 41.9 million as compared to RMB17.8 million in the Q1 of 2019 and RMB17.4 million in the Q1 of 2019. Other operating income net in the Q1 of 2020 increased by 11.4 percent to RMB16.6 million from RMB14.9 million in the same period of 2019. Adjusted operating income in the Q1 of 2020, which excludes share based compensation expenses, was RMB259.5 million, compared to an adjusted operating loss of RMB30.6 million in the same period of 2019. Net income in the Q1 of 2020 improved to RMB254.5 million from RMB18.2 million in the same period of 2019. Adjusted net income in the Q1 of 2020, which excludes share based compensation expenses, sharehold loss in active method investments and impairment loss of investment improved to RMB296.9 million from RMB35.3 million in the same period of 2019, implying an adjusted net margin of 13% for the Q1 of 2020. For the Q1 of 2020, basic and diluted net income per ADS were RMB0.82 and RMB0.79 respectively, while adjusted basic and diluted net income for ADS were RMB0.95 and RMB0.95 respectively. In the coming months, we remain focused on improving our monetization capabilities and efficiencies as well as further utilizing our operating leverage to pursue the sustainable development of our platform. We expect our total net revenues for the Q2 of 2020 to be in the range of RMB2.36 billion to RMB2.41 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. We will now begin the question and answer session. And the first question today comes from Li Zhang of Bank of America Securities. Please go ahead. First, congrats on the strong results. And my first question is about user churn. Can you give us more color on the recent user related churn post people resuming work? And secondly, wondering the COVID-nineteen impact to our game and non game content? Thank you. Hi, Lei. Thanks for your question. I will now have translate about the answers. Actually in terms of your first question, according to the data from our platform, our total MAUs and the average data time spent by each active users have remained stable without any significant fluctuations since the wider work assumption of in China in March. In particular, our mobile MAUs and user engagement were maintained at a high level. This is because users have formed good watching and using habits in our platform to the years of our platform's operation and also the development. And in terms of your second question, although the Q1 is kind of traditional slow season, we implemented a productive guidelines to encourage more quality streamers, which help to augment the total live streaming hours. As we increase the amount of quality content on our platform, more users were attracted to our platform, especially from the mobile end. The user engagement level further increased as well. For our gaming segment, the epidemic result in an overall improvement of the user traffic in game industry, driven the growth of users for all popular game segments and also the new blockbuster game sectors on our platform during the period. Actually during the Q1, our gaming live streaming segment accounted for about 80% of the total viewership. The overall revenue generated from the game live streaming also maintained a rapid growth trajectory. In terms of non gaming segment, active users and also total viewership have remained relatively stable. In general, during this pandemic, though we ensure the abandon to production of high quality content across all segments and satisfies user's billing performance through proactive operational refinement. This also help us increase the user engagement on our platform. Thank you. Operator, please address the next question. The next question comes from Brian Gong of Citigroup. Please go ahead. I will translate myself. Thanks, management, for taking my question. Congratulations for the solid results. Management shared the updated view on the competitive landscape in game live streaming industry. Any change on the competition from Billie and Kuaishou? Thanks. Thanks for your question. Since the Q4, the industry's competitive landscape has not changed significantly. As a leading game live streaming platform, Douyin continued to build our game centered content ecosystem, energize our Esports community and explore other related areas such as game short form video. Since Kuaishou and Billie entered into the game live streaming industry, both user traffic and also the user traction has been boosted, which also helped to raise the entire game live streaming market ceiling and benefited the industry's development. From competition perspective, since the forbidden of streamers switching between platform, the industry has remained a healthy competitive landscape. On top of this, our premium top and mid tier streamers resources help us create strong content barrel. Therefore, we have more advantage when competing with both existing players and also the new players in the industry. We will also take advantages of our professional product premium content to increase our mobile user traffic and increase our competitive edge. Yes. Thank you. Operator, please address the next question. The next question comes from Thomas Chong of Jefferies. Please go ahead. My question is about the revenue growth trend as well as the key factors in driving our revenue growth. Thank you. Thanks for your question. The quarter over quarter increase in our live streaming revenue resulted from our ongoing improvement to interactive features, which were made to increase user and also streamers' interactions. Also the users willingness to pay and the users' payment frequency. In the Q1 of 2020, our quarterly paying users increased by 4.1% to 7,600,000 from 7,300,000 in the Q1 of 2019. ARPU also achieved around 7% quarter over quarter increase. Our refinement of operations across segments helped to improve each segment monetization efficiency. We also enhanced our development of live streaming content diversification, which includes the monetization efficiency and the revenue contribution of our gaming segment. We increased our interactive functions such as the streamer ticket system, which also aim to improve the monetization efficiency of our mid tier streamers. Our development of monetization activities help to increase revenue from daily sales driven events on our platform also. Okay, thank you. Operator, could you help us address the next question? Thank you. The next question comes from Alex Poon of Morgan Stanley. Please go ahead. I'll translate my questions. My question is related to the game streamers. First of all, can you share with us the risk of concentration of your top streamers? And second is, can you share with us your development strategy for game streamers in future? And third is about how can we raise the monetization efficiency of the middle layer streamers? Thank you very much. Okay. Thanks for your question. As we mentioned before, we have signed a 3 to 5 years contract with the top 100 streamers already that there will be a stable situation in the top streamers on our platform. Moreover, we still keep the strategy, which is the top streamers contributing significantly to the premium content and the overall viewership, while mid tier and long tail streamers help us diversify our content offering and improve the monetization efficiency. By cultivating the new streamers, Parete agencies will continuously provide valuable streamer resources to our platform. We have also taken several measures to improve our monetization efficiency of mid tier streamers. We kept updating our related functions to enhance our monetization capabilities. According to our efforts, the number and the qualities of our mid tier streamers keep increasing during the Q1. For example, the total numbers of streamers with revenue above 10 ks per quarter have reached around 40% year over year growth. Okay. Thank you. Operator, please address the next question. The next question comes from Daniel Chen of JPMorgan. Please go ahead. I will quickly translate myself. My question is on the PC MAU trend. So PC MAU seems to be declining on year over year and sequential basis in the Q1. I'm not sure if it's related to the COVID-nineteen or is there some other reasons for the decline? And how should we look at the PC and mobile user growth in the next few quarters when the work resumes? Thank you. Thank you, your question. Our PC MAU declined in the Q4, which was mainly due to the closure of the Internet cafe during the epidemic causing actually causing a reduction in Internet cafe PC users. Also some Internet cafe PC users, we have looked at their chance, their billing performance to personal computers or the mobile phones during this period. This trend for our PC MAUs has been raising our expectation. On the other hand, we actually maintained rapid growth in the mobile MAUs during the Q4. Such growth actually was mainly driven by the increasing streaming hours, the launch of new quality games and also our continued deepened cooperation with game developers. Actually, if we look at about from the Q2, actually we continue addressing our fan firm operation has allowed us to maintain at a stable mobile MAU growth. Looking ahead, we think that we will continue to focus on the rapid growing our mobile users. We also believe that in general mobile users actually have a higher levels of engagement and also the pain ratio. And the mobile segment of the market, we think it will be still have a large growth potential, which should allow us to improve our penetration rate. Okay. So thank you. Operator, let's address the next question. Certainly. The next question is from Alex Liu of China Renaissance. Please go ahead. Thanks for taking my questions. My question is on the gross margin. We saw the gross margin trend up pretty well in the Q1 of 2020. How should we think about the trend of revenue sharing, common costs and bandwidth costs down the road? Thank you. Yes. Thanks for your question. We will maintain our revenue sharing policy at half half lead between platform and also streamer and talent agency. We will also offer certain incentives to streamers and also the talent agencies during the promotional period. And therefore, actually the overall revenue sharing visual may fluctuate slightly quarter over quarter. As a game centric live streaming platform, we will continue to invest more in content related to Esports games and also the potential blockbuster games, especially in the top 8 sports tournaments and self produced premium content. We will also invest more on the overseas streamers and the new potential streamers with the new game title launch. Overall, the content cost will show upward trend in absolutely value, but it will keep a gradually decreasing trend as a percentage of the total revenue. And also if you look at about the bandwidth cost, actually it's mainly due to the user growth on our platform, we should see if we're looking forward, actually the bandwidth cost will increase at absolutely value, but it will still keep a rather decreasing trend as a percentage of the total revenue. Okay. Thanks for your questions. There are no further questions. This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Okay. So thank you for joining our call today. We're looking forward to speaking with everyone next quarter. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

• Earnings release