Earnings Call: Q4 2019

Mar 19, 2020

Good morning and good evening, ladies and gentlemen. Thank you, and welcome to the value International Holdings Limited's 4th Quarter 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. 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. Shao Jie Chen, Chairman and Chief Executive Officer Mr. Memin 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.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 our 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. Shaojie Chen. Before we walk you through our performance in the Q4, I would like to briefly discuss about the impact of the COVID-nineteen 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 RMB2.06 billion, while gross profit increased by over 900% year over year to RMB375.2 million, implying a gross margin of 18.2 percent. Net income reached RMB157.4 million, representing a net margin of 7.6%. Adjusted net income increased to RMB186.4 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 165,800,000 driven by the robust growth of mobile MAUs, which increased by 29.3% year over year to 54,400,000. 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 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 field streamers per user and followed streaming rooms per user steadily increased in the 4th quarter, 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. Now 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 partnership with several championship esports teams, including KPL Champion E Star and PUBG Global Champion Gen. G to further bolster our content offerings. We also partner with top tier game commentators and official Esports tournament commentators to produce over 50 high quality Esports related programs and events. In addition, 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 7,300,000, implying a paying ratio of 4.4 percent as compared to 2.8% in the prior year period. Meanwhile, ARPU increased by 7.8% year over year to RMB261 in the Q4. These strong monetization results were mainly driven by 3 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. And 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 the 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, Youle 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 costs. 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 5.3 Cloud Gaming Industry Alliance in China. On the international markets, we continued to expand overseas and increased investments in the Japan market during the Q4. Our live streaming product, Neildom, 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 4th quarter 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, Mama. Hello, everyone. Total revenues in the Q4 of 2019 increased by 77.8 percent to RMB2.06 billion from RMB1.16 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 RMB157.4 million from a loss of RMB271.4 million in the same period of 2018. Adjusted net income in the Q4 of 2019 was RMB186.4 million compared with an adjusted net loss of RMB232.5 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 point 8% year over year to RMB2.06 billion, including RMB1.89 billion in live streaming revenues as well as RMB117.4 million in advertising and other revenues. Live streaming revenues in the Q4 of 2019 increased by 84.1 percent to RMB1.89 billion from RMB1.03 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 7,300,000 paying users in the Q4 of 2019 from 4,200,000 paying users in the same period of 2018. In addition, as we continue to deepen our collaborations with talent agencies, This improvement 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 percent to RMB170.4 million from RMB132.1 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 0.2% to RMB1.69 billion from RMB1.12 billion in the same period of 2018. More specifically, revenue share fees and the content cost in the Q4 of 2019 increased by 60.4 percent to RMB1.47 billion from RMB919 million in the same period of 2018. This increase was primarily driven by 2 factors. 1st, increases in revenue share fees in line with increases in total net revenues and second, increased investments in both e sports related content rights and in house content production, partially offset by the gradual decreases in sign up bonuses for top streamers as the result of industry wide cooperation to reduce competition for top streamer talent. Fund based cost in the Q4 of 2019 remained relatively stable amounting to RMB151,400,000 as compared with RMB RMB152,700,000 in the same period of 2018. Notably, increases in bandwidth usage due to a larger user base and a higher user engagement on 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 percent to RMB375,200,000 from RMB36,300,000 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 RMB134.1 million from RMB173.2 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 RMB102 200,000 from RMB92.4 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 RMB76.4 million compared with RMB74.1 million in the same period of 2018. Share based compensation expenses allocated to operating expenses in the Q4 of 2019 were RMB17 point 4,000,000 as compared to RMB 22,200,000 in the Q4 of 2018 and RMB228.2 million in the Q3 of 2019. Other operating income net in the Q4 of 2019 increased by 245.5 percent to RMB59.7 million compared with RMB17.3 million in the same period of 2018, mainly due to the increase of the government subsidies. Adjusted operating income in the Q4 of 20 19, which aspect share based compensation expenses increased to RMB 141,500,000 compared with an adjusted operating loss of RMB 264,000,000 in the same period of 2018. Net income in the Q1 of 2019 improved to a gain of RMB 157,400,000 from a loss of RMB271,400,000 in the same period of 2018. Adjusted net income in the Q4 of 2019, which aspects share based compensation expenses, shelf loss in equity method investments and impairment loss of investments was RMB186.4 million, compared with an adjusted net loss of RMB232.5 million in the same period of 2018. For the Q4 of 2019, basic and diluted net income per ADS were RMB0 point 5 and RMB0.48 respectively, while adjusted basic and diluted net income per ADS were RMB0.58 and RMB0.58 respectively. As of December 31, 2019, our cash, cash equivalents and restricted cash totaled RMB8.13 billion. This 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 RMB2.1 billion to RMB2.16 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. The first question comes from Li Zhang of Bank of America Securities. Please go ahead. Thanks management for taking my question and wish everyone could help. My first question is regarding the coronavirus impact given our headquarter is located in Wuhan, any impact to our operations? And how the outbreak may impact the game streaming business in terms of user and revenue? Do you observe any change in user behavior after people resuming off work? And secondly, I want to know our new initiatives about the cloud gaming. Any color you can share? And what's management's expectation in terms of user revenue and any cost associated with this new cloud gaming things that may impact our margin? Thank you. Thank you, Lei, 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. So since the coronavirus outbreak occurred, we immediately adjusted our working methods while continuously tracking our employees' health. To date, our employees have worked from home and with the technical support from our IT department and we continue to execute our operations smoothly across all business departments. So now our employees and 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. And Q1 of the year, given the spring festival holiday is generally not a strong season for game live streaming. So this is because of the relatively small amount of major e sports events during this period and the number of active streamers in the Q1 is also at the bottom of the year typically. So but 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 activities. So 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 impact on our business for the remaining of the Q1 and beyond. So regarding your second question on cloud gaming, we have currently cooperated with 2 cloud gaming technology providers to explore cloud gaming development on both PC and mobile end, including around 20 PC games and 30 mobile games. And 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. And 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 up of cloud gaming distribution and advertising. And by that time, we believe that cloud gaming would not only become one of our key user scenario, 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? Yes. We are working with technology developers like Tencent and Google and Douyu as a cloud gaming platform where the technologies are deployed, we'll continue to explore different ways for our monetization, including online advertising and same distribution related to cloud gaming. Okay. Thank you. Thank you so much. The next question comes from Daniel Chen of JPMorgan. Please go ahead. So I have two questions. My first question is related to some competition landscape because I would say Tencent, they actually have the option to that can enable them to increase their shareholding increase their voting power in Huya to 50.1% and a potentially consolidated company. So if Tencent really exercise that option, what will change between the relation of Douyu and Tencent? And is it possible that 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 flattish Q o Q. So wondering what is the future trend and what is the major driver for the bandwidth cost in the next one to 2 years? Thank you. Okay. I'll help translate. Okay. So 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 Hoya 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. So 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 2 platforms don't have much difference in terms of Tencent shareholding percentage. So 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. So going forward, we expect to maintain a close strategic relationship with Tencent. Okay. Regarding your second question on bandwidth cost, the 4th quarter is an event intensive season. However, our bandwidth cost did not increase with user traffic. This was mainly due to number 1, proactively manage peak traffic times during tournaments and events to improve bandwidth usage efficiency and number 2, the development of proprietary CDN and P2P technologies, which helped us to reduce our technology outsourcing costs significantly. So our optimization of bandwidth cost per unit contribute to the stable total bandwidth cost in the 4th quarter. So regarding the future trend, as we've just mentioned, we will continue to develop and deploy the proprietary CDN and the P2P technologies. So bandwidth cost in absolute value would increase as a result of our growing user traffic. But 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. Hello. I'll translate the question myself. So 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 streamers' resource allocation? Thank you. So streamers that are still in the contract period with us will not be affected by other players like Kuan Shou 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 incubators. In with incubators. And 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. But 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 Chang of Jefferies. Please go 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 1 year? And then I have some follow-up questions. Thank you. Okay. So regarding your question on the streamers, we currently have generally 5 year term contract with majority of our streamers. So out of our top 100 streamers, currently none of them will have their contract to expire within a year. And we always believe that top streamers are less concentrated on our platform in terms of both traffic and revenue contribution. And historical data also shows that streamers who do not renew their contract with us will have very minimal impact on both revenue and traffic. So 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 contributed 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. And 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 efficiency the efficient management of mid tier streamers. And as compared to 2018, now we have established a very comprehensive talent agency model. And second, we kept updating our interactive features to enhance our monetization capabilities. And 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. 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. So 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 e sports content, such as LL, PUBG, King of Glory and Call of Duty, etcetera. We will also pay close attention to the new blockbuster games and explore the suitable live streaming categories throughout the industry verticals. So to give you an example, since the streaming of COD 16 on our platform in this quarter, in the 1st 2 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. And we also explore other areas related to gaming content such as game videos and game shot videos. For our non gaming 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, etcetera to meet a broader range of the users' viewing preference. And 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 this last year, the revenue and paying user of the game partner business increased rapidly. And 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. And 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. And the last questioner this evening will be Alex Liu of China Renaissance. Please go 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? And my second question is on the revenue sharing and constant cost. Could management give us a rough breakdown of this cost item and walk us through the drivers of these costs into 2020? Thank you. So regarding your first question on our overseas development, In the Q4, we continued to explore these overseas market that we have invested. And after market investigation in Southeast Asia, India and South America, we figured that this market has limited potential to grow further. Although we achieved over 10,000,000 MAU in these areas, this market demonstrated very low user retention and limited monetization potential. And therefore, we decided to shift our main focus to Vietnam and Indonesia and gradually reduce our exposure in the remaining of the market we already invested. But in the meantime, our product in the Japanese market, Melden, 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. So regarding your second question on revenue sharing and content cost, we will maintain our revenue sharing policy at half half split between the platform and the streamers and talent agencies. We will also offer certain incentives to the streamers and talent agencies during our promotional period and therefore the overall revenue sharing ratio may fluctuate slightly quarter over quarter. 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. And since the industry wide adoption of the standardized guidance for streamer behavior in early 2019, we launched ranking based streamer contract 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. So 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.