Good morning and good evening, ladies and gentlemen. Thank you and welcome to DouYu International Holdings Limited's Q4 and full- year 2019 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. If you require operator assistance, please press star then zero. Please note this 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 DouYu. Please go ahead, ma'am.
Thank you. Hello, everyone. Welcome to our Q4 2019 earnings call. Joining us today are Mr. Shaojie 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 Q4 of 2019 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 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 filing 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 speak on behalf of our Chairman and CEO, Mr. Shaojie Chen. Before we walk you through our performance in the Q4 , I would like to briefly discuss about the impact of the COVID-19 outbreak on our business.
Since the outbreak occurred, we immediately adjusted our working method while continuously tracking our employees' health. To date, our employees have worked from home, and we continue to execute our operations smoothly across all departments. From a business perspective, we have seen several major esports tournaments postponed. However, the extended holiday period has increased the likelihood that users will play games and watch live-streaming esports content. As such, the overall user activity on our platform has increased steadily since the outbreak began. We plan to closely monitor the epidemic as it evolves and evaluate its impact on our business in the Q1 and beyond. We have concluded the Q4 of 2019 with solid financial and operational results. In particular, we achieved strong top-line growth.
During the quarter, our total net revenues increased by 77.8% year-over-year to RMB 2.06 billion, while gross profit increased by over 900% year-over-year to RMB 375.2 million, implying a gross margin of 18.2%. Net income reached RMB 157.4 million, representing a net margin of 7.6%. Adjusted net income increased to RMB 186.4 million, representing an adjusted net margin of 9%. Meanwhile, our user base further expanded during the period, with average MAUs increasing by 8% year-over-year to 165.8 million, driven by the robust growth of mobile MAUs, which increased by 29.3% year-over-year to 54.4 million. Our steady user growth during the Q4 was mainly generated through organic growth and was driven by premium content from top esports tournaments, diversified content offerings across all segments, and a deepened collaboration with game developers.
During the quarter, our game live streaming segment continued to perform well, accounting for approximately 80% of total viewing hours. At the same time, we also diversified the scope of our content coverage for non-game segments to meet a broader range of user viewing preferences and further penetrate additional user segments. As a result, we maintained high level of overall user engagement and stickiness. For example, the number of viewed streamers per user and followed streaming rooms per user steadily increased in the Q4 while the users' willingness to interact with streamers and the online community continued to improve. Going forward, we plan to continue deepening our collaborations with game developers and leveraging new blockbuster game titles to boost our platform traffic and accelerate user growth. Turning to our content initiatives for the Q4 .
During this period, we continued to invest in quality game content with a focused investment strategy for high ROI content and streamers. As part of this process, for example, we selectively eliminated our partnerships with low ROI streamers and reallocate our investments and internal resources to more cost-effective content. We also continued to make good progress in creating value along the esports value chain. For example, during the quarter, we broadcasted over 100 large-scale esports tournaments and inked partnerships with several championship esports teams, including KPL champion eStar and PUBG global champion Gen.G, to further bolster our content offerings. We also partnered with top-tier game commentators and official esports tournament commentators to produce over 50 high-quality esports-related programs and events. During the quarter, we also self-produced over 50 esports tournaments, including Golden Grand Tournament, which was in line with our overarching content creation strategy.
For streamer management, top streamers contributed significantly to premium content, overall viewership, and user stickiness. At the same time, our collaboration with talent agencies enabled us to efficiently manage the large pool of mid-tier and long-tail streamers while boosting the monetization potential of this big streamers group, further contributing to the diversification of our content offerings as well as the steady growth in revenue on the platform. We believe this streamers group will serve an increasingly important role going forward. Looking ahead, we plan to continue focusing on premium esports content while diversifying our content offerings, improving our operational capabilities across different content categories, and exploring new initiatives in premium content creation and distribution by partnering with game developers. Beyond our steady progress on the content front, we also continued our monetization efforts in the Q4 .
Notably, our quarterly paying users increased by 17.8% year-over-year to 7.3 million, implying a paying ratio of 4.4% as compared to 2.8% in the prior year period. Meanwhile, ARPU increased by 7.8% year-over-year to RMB 261 in the Q4 . These strong monetization results were mainly driven by three factors. The first was our continuous product innovation, which helped to stimulate user engagement. The second was our previously mentioned efforts to further refine our talent agency partnerships. The third was our ongoing production of a series of monetization events, which has helped to better cultivate our monetization network. Going forward, we believe that these three drivers will maintain their efficacy and continue to advance the sustainability of our revenue growth trajectory. During the quarter, for product innovations, we accelerated the development of several interactive features to better track and cultivate users' spending habits.
For example, we created a competition system and set tasks to different streamers and their fans, which effectively increased the exposure and popularity of mid-tier streamers while also enhancing their monetization efficiency. As a result, the revenue contribution from mid-tier streamers increased in the period as compared to previous quarters. For other monetization initiatives, we held our annual event, Yule Ceremony, at the end of the quarter, which effectively contributed to both viewership and revenue generation. In addition, the Super Fans Club served as a weekly supplement to our small amount fans gifting system and significantly increased the revenue contribution from users' daily spending on our platform. We were quite pleased by what we have achieved through these monetization initiatives during the quarter.
Looking ahead, we plan to continue upgrading our interactive product features, strengthening our relationship with both streamers and talent agencies, exploring new innovative monetization events, and refining our operations across each segment. We are confident that such measures will further enable us to boost our monetization efficiency in each platform segment and live streaming room. On the technology front, we continued to invest in our technology infrastructure and maintained steady progress in the quarter. For example, our refined proprietary P2P technology has further augmented our ability to accurately assess bandwidth usage during different traffic periods, as well as our ability to optimize our bandwidth allocation among various suppliers to significantly reduce the redundancy cost. We also increased our investments in areas with high growth potential in the quarter. For example, we investigated cloud gaming with a number of other technology providers in the period.
We continued to make good progress on this front and are among the first group of members to join the 5G Cloud Gaming Industry Alliance in China. On the international market, we continued to expand overseas and increased investments in the Japan market during the Q4 . Our live streaming product, Mildom, which was originally launched in Japan at the end of September 2019, maintained its healthy user growth trajectory during this quarter. Overall, we are pleased with our achievement in the Q4 , as they have enabled us to lay an important foundation for enduring growth going forward. As we advance into 2020, we will continue to provide high-quality content, explore opportunities in both up and downstream segments of game value chain, improve our operational efficiencies across different segments, and dive more deeply into the research and development of new technologies to further optimize our user experience.
Most importantly, we will increase our focus on further developing our monetization capabilities, which will drive the long-term financial growth and performance of the company in turn. 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, Mao Mao. Hello, everyone. Total revenues in the Q4 of 2019 increased by 77.8% to RMB 2.06 billion from RMB 1.16 billion in the same period of 2018, exceeding the high end of our previous guidance range. Gross margin in the Q4 of 2019 expanded to 18.2% from 3.1% in the same period of 2018. Additionally, net income in the Q4 of 2019 increased to a gain of RMB 157.4 million from a loss of RMB 271.4 million in the same period of 2018. Adjusted net income in the Q4 of 2019 was RMB 186.4 million, compared with an adjusted net loss of RMB 232.5 million in the same period of 2018. Now, please allow me to provide you with some more details regarding our key financial metrics.
Total net revenues in the Q4 of 2019 increased by 77.8% year-over-year to RMB 2.06 billion, including RMB 1.89 billion in live streaming revenues, as well as RMB 117.4 million in advertising and other revenues. Live streaming revenues in the Q4 of 2019 increased by 84.1% to RMB 1.89 billion from RMB 1.03 billion in the same period of 2018. This increase was due to our ongoing upgrades to several of our interactive platform features, which helped to further increase user-streamer interactions and upgrade our user experience. As a result of these improvements, we were able to attract more paying users, reaching 7.3 million paying users in the Q4 of 2019 from 4.2 million paying users in the same period of 2018.
In addition, as we continue to deepen our collaborations with talent agencies, these improvements also enable us to further improve our monetization efficiency for mid-tier, long-tail streamers. Furthermore, the implementation of our content diversification strategy also helped to improve our monetization efficiency across both gaming and non-gaming live streaming segments during the quarter. Advertising and other revenues in the Q4 of 2019 increased by 29.0% to RMB 170.4 million from RMB 132.1 million in the same period of 2018. This increase was mainly due to our broadening brand awareness and the corresponding increase in demand from advertisers. Cost of revenues in the Q4 of 2019 increased by 50.2% to RMB 1.69 billion from RMB 1.12 billion in the same period of 2018.
More specifically, revenue share fees and content costs in the Q4 of 2019 increased by 60.4% to RMB 1.47 billion from RMB 919 million in the same period of 2018. This increase was primarily driven by two factors. First, increases in revenue share fees in line with increases in total net revenues. Second, increased investments in both esports-related content rights and in-house content production, partially offset by the gradual decreases in sign-up bonuses for top streamers as a result of industry-wide cooperation to reduce competition for top streamer talent. Bandwidth cost in the Q4 of 2019 remained relatively stable, amounting to RMB 151.4 million as compared with RMB 152.7 million in the same period of 2018.
Notably, increases in bandwidth usage due to a larger user base and a higher user engagement on our platform were completely offset by a lower unit purchase price and improved bandwidth utilization efficiency. Measures taken to ensure such results included proactively managing peak traffic times during tournaments and events, as well as further implementation of our self-developed P2P and CDN technologies. Gross profit in the Q4 of 2019 increased by 934.6% to RMB 375.2 million from RMB 36.3 million in the same period of 2018. Gross margin in the Q4 of 2019 expanded to 18.2% from 3.1% in the same period of 2018. 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, let's turn to our operating expenses.
Sales and marketing expenses in the Q4 of 2019 decreased by 22.6% to RMB 134.1 million from RMB 173.2 million in the same period of 2018. This increase was mainly due to reduced IPO-related marketing costs and lower branding expenses as a result of our expanded brand awareness. Research and development expenses in the Q4 of 2019 increased by 8.4% to RMB 102.2 million from RMB 92.4 million in the same period of 2018. This increase was mainly due to higher investments in development of new interactive product features, as well as higher share-based compensation expenses. General and administrative expenses in the Q4 of 2019 remained relatively steady at RMB 76.4 million, compared with RMB 74.1 million in the same period of 2018.
Share-based compensation expenses allocated to operating expenses in the Q4 of 2019 were RMB 17.4 million as compared to RMB 22.2 million in the Q4 of 2018, and RMB 228.2 million in the Q3 of 2019. Other operating income net in the Q4 of 2019 increased by 245.5% to RMB 59.7 million compared with RMB 17.3 million in the same period of 2018, mainly due to the increase of the government subsidies. Adjusted operating income in the Q4 of 2019, which excludes share-based compensation expenses increased to RMB 141.5 million compared with an adjusted operating loss of RMB 264.0 million in the same period of 2018. Net income in the Q4 of 2019 improved to a gain of RMB 157.4 million from a loss of RMB 271.4 million in the same period of 2018.
Adjusted net income in the Q4 of 2019, which excludes share-based compensation expenses, share of loss in equity method investments, and impairment loss of investments, was RMB 186.4 million, compared with an adjusted net loss of RMB 232.5 million in the same period of 2018. For the Q4 of 2019, basic and diluted net income per ADS were RMB 0.5 and RMB 0.48 respectively, while adjusted basic and diluted net income per ADS were RMB 0.58 and RMB 0.58 respectively. As of December 31st, 2019, our cash equivalents, and restricted cash totaled RMB 8.13 billion. These strong balances and healthy status of cash flows enable us to proactively expand our existing business, explore potential opportunities, and further strengthen our leading position in the game-centric live streaming segment.
Looking ahead, we will continue to work towards enhancing the monetization capabilities and efficiency of our platform while utilizing our healthy operating leverage to deliver positive returns for our shareholders on the long term. We expect our total net revenues for the Q1 of 2020 to be in the range of RMB 2.1 billion-RMB 2.16 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 the day. Operator, we are now ready to take questions.
We will now begin the question- and- answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed, and you would like to withdraw your question, please press star then two. For the benefit of all participants, please ask your question in Chinese first, then please repeat it in English. At this time, we will pause momentarily to assemble our roster. The first question comes from Li Zhang of Bank of America Securities. Please go ahead.
[Foreign language]. Hi. Thanks, management, for taking my question. Wish you all well good health. My first question is regarding the coronavirus impact, given our headquarters is located in Wuhan, any impact to our operations? How the outbreak may impact the game streaming business in terms of user and revenue, and do you observe any change in user behavior after people resuming of work? Secondly, want to know our new initiatives about the cloud gaming. Any color you can share, and what's its management's expectation in terms of user revenue, and any cost associated with this new cloud gaming thing that may impact our margin. Thank you.
Thank you, Li, for your question. I will take the first question regarding the impact of the coronavirus on our business, and Mr. Chen will comment on the second question. Since the coronavirus outbreak occurred, we immediately adjusted our working method while continuously tracking our employees' health. To- date, our employees have worked from home, with the technical support from our IT department, we continue to execute our operations smoothly across all business departments. Now our employees at headquarters in Wuhan have resumed their normal working schedule. However, as Wuhan has been severely affected by the epidemic, we consider the health of our employees to be our first priority, and therefore, we have encouraged them to continue working remotely until the end of the epidemic. Q1 of the year, given the Spring Festival holiday, is generally not a strong season for game live streaming.
This is because of the relatively small amount of major esports events during this period, and the number of active streamers in the Q1 is also at the bottom of the year, typically. This year, the extended holiday during the outbreak resulted in a quite steady user growth. Even after people go back to work recently, we have not observed any downward trend of user activity. In terms of revenue growth, we have also seen a promising trend, along with the user growth since the outbreak, and we would closely monitor the epidemic as it evolves, and evaluate its impacts on our business for the remaining of the Q1 and beyond.[Foreign language].
[Foreign language].
Regarding your second question on cloud gaming, we have currently cooperated with two cloud gaming technology providers to explore cloud gaming development on both PC and mobile end, including around 20 PC games and 30 mobile games. We have also launched a number of popular games on our test cloud game platform. We are still conducting internal tests, and our technical team will continue to improve the system based on these results. We are still in the testing stage, and considering the importance of user experience, we do not plan to monetize the cloud gaming before we finalize the product. In the mid to long run, we will continue to explore cloud gaming and hopefully by next year we would be able to finish the infrastructure and build out of cloud gaming distribution and advertising.
By that time, we believe that cloud gaming would not only become one of our key user scenarios, but also would help to further diversify our monetization. Thank you.
Hi, thank you. Can I follow up on cloud gaming? Do you use Tencent or other people's technology or you build it on your own? [Foreign language].
[Foreign language].
Yes, we are working with technology developers like Tencent and Google, and DouYu as a cloud gaming platform where the technologies are deployed. We will continue to explore different ways for our monetization, including online advertising and game distribution related to cloud gaming.
Okay, thank you, thank you so much.
The next question comes from Daniel Chen of J.P. Morgan. Please go ahead.
[Foreign language]. So I have two questions.
My first question is related to some competition landscape. I would say Tencent, they actually have the option that can enable them to increase their shareholding, increase their voting power in Huya to 50.1%, and potentially consolidate the company. If Tencent really exercise that option, what will change between the relation of DouYu and Tencent? Is it possible then DouYu and Huya are going to merge in the future? My second question is on the bandwidth cost. We see that the bandwidth cost actually is flat-ish Q-o-Q. Wondering what is the future trend and what is the major driver for the bandwidth cost in the next one- two years? Thank you.
[Foreign language].
[Foreign language].
Okay, I'll help translate.
First of all, we don't think there will be any major impact on our relationship with Tencent. Whether or not they execute the option to increase their voting power in Huya to above 50%. Tencent currently owns around approximately 38% of DouYu and has provided great support on capital and business front for our development in the past few years, and they are currently our largest shareholder as well as our most valuable strategic partner. If Tencent executes the option and increase their voting power in Huya to above 50%, from shareholding level, they would own less than 40% to achieve that, which means that the two platforms don't have much difference in terms of Tencent shareholding percentage. We don't think that Tencent would be unfair to either side even after they execute the option.
In terms of whether or not a potential merger would happen, we believe it's Tencent's decision. Our management would always prioritize the company's long-term development and the value of our shareholders. We have always been supported and trusted by our shareholders, including Tencent, in making key decisions on business front and leading the strategic development. Going forward, we expect to maintain a close strategic relationship with Tencent.
[Foreign language].
Okay. Regarding our second question on bandwidth cost. The Q4 is an event-intensive season. However, our bandwidth cost did not increase with user traffic. This was mainly due to, number one, proactively managed peak traffic times during tournaments and events to improve bandwidth usage efficiency. And number two, the development of proprietary CDN and P2P technologies, which helped us to reduce our technology outsourcing costs significantly.
Our optimization of bandwidth cost per unit contribute to the stable total bandwidth cost in the Q4 .
[Foreign language].
Regarding the future trend, as we just mentioned, we will continue to develop and deploy the proprietary CDN and the P2P technologies. Bandwidth cost in absolute value would increase as a result of our growing user traffic. As a percentage of our total revenue, it will decrease. Next question, please.
The next question comes from Alex Poon of Morgan Stanley. Please go ahead.
Hey. Hello. [Foreign language]. I'll translate the question myself. Regarding competition, there are some platforms recently raising the revenue share ratio to attract traffic, to attract streamers, and particularly, how do you see the competition with Kuaishou and Bilibili, in terms of this streamer's resource allocation? Thank you.
Streamers that are still in the contract period with us will not be affected by other players like Kuaishou or Bilibili, and the number of streamers that are available in the market is very limited, and we believe it's hard for the new player to establish a competitive content ecosystem to compete with incumbents.
DouYu [Foreign language].
Our revenue sharing system has been relatively stable throughout the development of the industry. We think that our strategy is very reasonable, and we'll continue with it going forward. In the meantime, we would consider to provide certain subsidies to the mid-tier and long-tail streamers during our event period to create higher quality content. Thank you. Next, please.
The next question comes from Thomas Chong of Jefferies. Please go.
[Foreign language] Thanks management for taking my question. I have a question about our streamers. Can management comment about the concentration for our top broadcasters, and how many top broadcasters need to renew their contract in the next one year? I have some follow-up questions. Thank you.
[Foreign language]，Thomas [Foreign language].
[Foreign language].
Okay. Regarding your question on the streamers, we currently have generally five years term contract with majority of our streamers. Out of our top 100 streamers, currently none of them will have their contract to expire within a year. We always believe that top streamers are less concentrated on our platform in terms of both traffic and revenue contribution. Historical data also shows that streamers who do not renew their contract with us will have very minimal impact on both revenue and traffic. Going forward, we will continue our streamer management strategy of signing exclusive contract with top streamers, and at the same time collaborating with talent agencies to cultivate and train the mid-tier and long-tail streamers. The top streamers contribute significantly to premium content viewership, while we believe that mid-tier to long-tail streamers help us diversify our content offering and improve monetization efficiency.
In the meantime, we will also continue our cost management for streamers to increase the overall operational efficiency. We have also taken several measures to improve our monetization efficiency of the mid-tier streamers group. First, we continue to leverage talent agencies to achieve the efficient management of mid-tier streamers. As compared to 2018, now we have established a very comprehensive talent agency model. Second, we kept updating our interactive features to enhance our monetization capabilities. For example, the launch of our streamers competition system effectively increased the exposure and popularity of the mid-tier streamers while also enhancing their monetization efficiency.
[Foreign language]. [Foreign language]. My follow-on question is about our content strategies. What are the new products that we are going to be launched as well as the business model going forward? Thank you.
Foreign language]. Thomas. [Foreign language].
[Foreign language].
Regarding your question on our content plan and innovation going forward. First of all, in terms of gaming content, we will continue to strengthen our investment in esports content such as LOL, PUBG, Honor of Kings, and Call of Duty etc. We will also pay close attention to the new blockbuster games and explore the suitable live streaming categories throughout the industry verticals.
To give you an example, since the streaming of COD16 on our platform in this quarter, in the first two weeks of March, we experienced significant growth in both the number of streamers as well as the total streaming hours for this game category as compared to February. We also explore other areas related to gaming content, such as game videos and game short videos. For our non-game segment, we will continue to enrich the content ecosystem, strengthen our cooperation with talent agencies, and also provide more diversified content covering multiple sectors such as talent show, outdoor, ACG, music, etc, to meet a broader range of the users viewing preference. In terms of monetization, we have been exploring different ways of revenue diversification. For example, our recently launched game partner business is a fast-growing business model in China, and after we launched in October last year, the revenue and paying user of the game partner business increased rapidly. Our data also showed that the average ARPU of the game partners business has increased very quickly, and has high potential, and will help us improve our monetization efficiency. For mid- to- long run, we are actively preparing for the deployment of cloud gaming and expect the game distribution as well as advertising of cloud games to become our next growth engine. Thank you.
Thank you.
The last questioner this evening will be Alex Liu of China Renaissance. Please go ahead.
[Foreign language]？My first question is on the overseas business. Could the management share some color on our current overseas business strategy and growth direction into 2020?
My second question is on the revenue sharing and content cost. Could the management give us a rough breakdown of this cost item and walk us through the drivers of these costs into 2020? Thank you.
[Foreign language].
[Foreign language].
Regarding your first question on our overseas development. In the Q4 , we continued to explore these overseas markets that we have invested. After market investigation in Southeast Asia, India, and South America, we figured that these markets have limited potential to grow further. Although we achieved over 10 million MAU in these areas, these markets demonstrated very low user retention and limited monetization potential. Therefore, we decided to shift our main focus to Vietnam and Indonesia, and gradually reduce our exposure in the remaining markets we already invested in. In the meantime, our product in the Japanese market, Mildom, has been launched by end of September last year and is currently performing very well. We would continue to maintain in-depth cooperation with our Japanese partners to take advantage of the local resources. Thank you.
[Foreign language].
Regarding our second question on revenue sharing and content cost, we will maintain our revenue sharing policy at half-half split between the platform, the streamers, and talent agencies. We will also offer certain incentives to the streamers and talent agencies during our promotional period. Therefore, the overall revenue sharing ratio may fluctuate slightly quarter-over-quarter.
[Foreign language].
As a game-centric live stream platform, we will continue to invest more in content related to the esports games and potential blockbuster games, especially in top esports tournaments and self-produced premium content. Since the industry-wide adoption of the standardized guidance for streamer behavior in early 2019, we launched ranking-based streamer contracts and implemented more strictly on streamers performance assessment to further optimize the signing bonus for exclusive top streamers, which we believe still has further room for improvement. Overall, we believe that content cost will show an upward trend in absolute value, but it will decline as a percentage of total revenue. Thank you.
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 our call today. We look forward to speaking with everyone next quarter. If you have any questions, please contact the IR team of DouYu. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.