Earnings Call: Q2 2019

Aug 13, 2019

Earnings release

Good morning and good evening, ladies and gentlemen. Thank you, and welcome to the Douyu International Holdings Limited Second Quarter 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. I will now turn the call over to the first speaker today, Ms. Mao Lau, IR Director of Da Yi. Please go ahead, ma'am. Hello, everyone. Welcome to our Q2 2019 earnings call. Joining us today are Mr. Shao Jie Chen, Chairman and Chief Executive Officer Mr. Mingming Su, Chief Strategy Officer and Mr. Hao Cao, Vice President of Finance. You can refer to our Q2 of 2019 financial results on our IR website at ir.souyu.com. You can also check a replay of this call where it becomes available in a few hours on our via our 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 unknown and non risks, uncertainties and other factors not under the company's control, which may cause actual results, performance or achievements of the company to be materially different from the results, performance or expectations implied by these forward looking statements. All forward looking statements are expressly qualified in their entirety by the cautionary statement, risk factors and details of the company's filings with the SEC. The company undertakes no duty to revise or update any forward looking statements for selected events or circumstances after the date of this conference call. I will now turn the call over to our Chairman and Chief Executive Officer, Mr. Shaojie Chen. Please go ahead, sir. Hello, everyone. Welcome to our Q2 2019 earnings conference call, also our very first earnings call as a public company. We are pleased with our robust growth trajectory during the quarter as our total revenue increased by 133.2% year over year to RMB1.87 billion. Our gross profit increased by 823.8 percent year over year to RMB301 1,000,000 with gross margin expanding to 16.1%. Our adjusted net income reached RMB52.6 million with an adjusted net margin of 2.8%. The average total MAUs in the quarter increased by 32.6% year over year to 162,800,000, while the average mobile MAUs increased by 42.5% year over year to 50,600,000. Our quarterly paying users reached 6,700,000 implying a year over year growth of 123.3%. In the Q2, we were able to expand our user base substantially driven by user growth on both mobile and PC. The rapid mobile MAU growth in the Q2 was driven by our continuous efforts to upgrade our product functionality and user interface such as the instant turn on feature, which enhances user experience on our mobile app. As the user bandwidth cost of 4 gs networks gradually declined, we saw the number of users watching streaming content through 4 gs explode. The average mobile MAUs who visited our app through a 4 gs network increased by 39% year over year. With the increasing popularity of 4 gs and the coming launch of 5 gs networks, we are confident that our mobile MAUs will continue to grow at a fast pace and become one of the key drivers for user growth. At the same time, our PC user base maintained its steady growth trajectory. During the Q2, our average PC MAUs increased by 28.5% year over year to 112,200,000, mainly driven by the improving penetration and rising popularity of esports games such as DNF, CS:GO and TFT. These type of esports games tend to attract hardcore gamers who are extremely loyal live streaming viewers and contribute high life cycle user value. In addition, the gradual resumption of regulatory approval for game licenses has led to the introduction of new games onto the market and the associated user growth. As the esports industry evolves and consolidates continuously, our market leadership has enabled us to attract an increasing number of high quality streamers to our platform, thus further enhancing our content and accelerating our user attraction capabilities. Also, as we launch more diversified product functionality and improve the social features of our online community, our user engagement is perpetually on the rise. In the second quarter, the total billing time of our active users achieved 2,500,000,000 hours, representing a year over year increase of 56%. As we continue to convert e sports gamers into game live streaming viewers, we are confident that we will be able to attract more and more users and fortify our leadership position as the largest game centric live streaming platform in China. During the Q2, we further enhanced content throughout our game centric live streaming ecosystem to improve user stickiness. Game live streaming contributed more than 80% of total viewership and approximately 50% of revenue from live streaming for this quarter. Our game centric premium content is effectively supplemented by pay entertainment and talent shows, enabling us to build up a comprehensive content creation system while achieving better user outreach and diversified monetization. As we continue to invest in esports to capture its growth and monetization potential, we self organized and live streamed 38 Esports tournaments and broadcasted 76 additional high quality Esports tournaments during the Q2. Our Golden Grant tournament, for example, attracted 17,700,000 viewers in the first half of the year. During the 2019 Douyu Carnival in June, we broadcasted 33 esports competitions and attracted over 310,000,000 online viewers. To complement our direct investment in esports content, we sponsored a number of top esports teams including IG Team, who won the World Championship of AOL Season 8 and Istar Team, who won the KPL Spring 2019 Championship. We also explored cooperative initiatives with Tencent in several esports tournaments such as the interactive audience tiering system for KPL. Going forward, we plan to expand and deepen our esports viewpoints through esports team sponsorships and esports tournament organization to ensure a consistent supply of high quality content, grow our user base and discover new monetization opportunities. For streamers, we continued to refine our exclusive contract model to work directly with our top streamers, which contributed significantly to premium content production and user attraction. At the same time, we utilize our talent agency model to engage and manage long tail streamers efficiently. We believe that those two models combined are critical to streamer diversification and monetization. We view premium game content as our key competitive advantage. Looking forward, we are committed to building out our game centric content production system, fine tuning our operations within each segment and improving our streamer development mechanism. In addition, through our precise identification of new mega hit games, we should be able to enhance our user conversion and deepen our market penetration. During the Q2, we continued to see further improvement in monetization. Our quarterly paying users increased by 123.3% year over year to 6,700,000 with a paying ratio of 4.1 percent and a quarterly ARPU increase of 14.3% year over year to RMB256. We are currently deploying different monetization strategies in different segments. For game live streaming, we increased our users' willingness to pay through small amount gifting and our fan system. Once a user bought his or her first fan card, we successfully transformed that user's consumption habit and converted a casual user into a paying user. Moreover, we perpetuated his or her consumption through superior user experience by continuous product upgrades and social feature enhancements. Looking forward, we believe that game live streaming has a huge monetization potential. In addition to game live streaming, we continued to enrich our premium membership system in the entertainment and talent show segments to better cater to users' needs. By strengthening our cooperation with talent agencies, we further improved our monetization efficiency. Also, we worked closely with streamers and motivated them to take the initiative of promoting their user interactions and managing their live streaming rooms as self sustaining independent platforms. For example, we provided our streamers with back end data support and a series of operational tools so that they could increase their user traffic by utilizing these data and tools. In this way, we were able to improve our monetization efficiency across the entire platform. In the Q2, we continued to develop our AI and big data capabilities to satisfy varied customer demands, increase user traffic, improve user stickiness and enhance user monetization. For example, our AI backed video identification system can dynamically segment streamers to produce a precise match with user preferences. Users can also filter and select their desired content based on screen display information. With the expected introduction of 5 gs technology, we foresee a whole new slew of business opportunities emerging for the game centric live streaming industry. We are actively investing in technology and preparing for the new dawn of the 5 gs era. In overseas expansion, we have established a foothold in India as well as Southeast Asia, including, for example, Vietnam and are actively exploring additional opportunities in Japan. While we pay close attention to overseas markets, we believe such opportunities are still at the early stage of their development. It will take time to educate overseas users and cultivate their paying habits. Therefore, we should remain prudent in our assessment of investment opportunities in overseas markets. To conclude, we accomplished better than expected financial and operational results during the Q2. To maintain our market leadership as the largest game centric live streaming platform in China, we will continue to lay the foundation for each link in the game live streaming and esports value chain, while improving our operating efficiency and financial performance to create value for our shareholders in the long run. With that, I will 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, Xiaojie. Hello, everyone. Please let me go through our Q2 financial results. Due to our continuous efforts in growing our user base, enriching and improving the quality of content, cultivating users' pain habits as well as broadening our brand awareness, our total net revenues increased by 130 3.2% year over year to RMB1.87 billion in the 2nd quarter. Improvements to both our paying user base and ARP drove our live streaming revenues to RMB1.71 billion in the Q2 of 2019, representing 156.0 percent year over year growth. During the Q2, we continued to leverage our integrated promotion activities to reach a broader group of users with our enhanced brand awareness. As a result, our advertising and other revenues increased by 21 point 2% to RMB164.4 million in the Q2 of 2019 from RMB135.6 million in the prior year period. Coinciding with our revenue growth and benefiting from our upgrades to technology, revenue sharing fees and content costs as well as bandwidth cost increased at a slower pace relative to our revenue growth in the Q2 of 2019. During the quarter, cost of revenues increased rapidly by 104.0 percent to RMB1.57 billion from RMB 770 point 3,000,000 in the prior year period. Revenue sharing fees and content costs increased by 121.2 percent to RMB1.33 billion from RMB599.8 million in the prior year period, primarily due to the higher revenue sharing fees caused by increased live streaming revenues and our expanded content offerings, which we continue to bolster by investing in quality content production by the platform and the content rights to broadcast esports related content. Bandwidth cost increased by 15.2% to RMB153.3 million from RMB133 1,000,000 in the prior year period, which was primarily due to the growth in our user base and increase in user engagement on our platform. As we continue to introduce more high quality products and services onto our platform, our bandwidth cost will continue to rise in absolute terms in order to ensure smooth live streaming experience. Importantly, these increases to bandwidth cost will be partially offset by our improvements to bandwidth utilization efficiency attributable to the continued deployment of new technologies in content distribution. In the Q2 of 2019, our gross profit increased by 823.8 percent to RMB 3 101.1 million from RMB 32.6 million in the prior year period. In addition, gross margin increased to 16.1% in the Q2 of 2019 from 4.1 percent in the prior year period. Such gross margin improvements were primarily attributable to our continuous improvements in monetization capabilities, bandwidth utilization through technology upgrades and operational efficiency. Operational efficiency improvements also contributed to the development of economies of scale on the platform, which has helped to boost gross margin in turn. Let's now take a look at operating expenses. Our sales and marketing expenses increased by 17.4 percent to RMB167.8 million in the Q2 of 2019 from RMB142.9 million in the prior year period, which was mainly attributable to the increase in greater efforts in promoting our brand awareness, esports contents and offline events. Research and development expenses remained relatively stable at RMB84.4 million in the Q2 of 2019 compared with RMB82.9 million in the prior year period. General and administrative expenses increased by 98.4 percent to RMB73.3 million in the Q2 of 2019 from RMB37 1,000,000 in the prior year period, which was mainly due to the increased share based compensation expenses related to the awarding of restricted share in connection of our acquisition for Nono Life in October 2018 as well as the increase in salaries and benefits of our management team as a result of our business expansion. During the Q2 of 2019, both our sales and marketing expenses as well as general and administrative expenses as a percentage of our total net revenues exhibited a year over year decrease. These improvements were mainly due to our initiatives to strengthen operating leverage. Other operating income net was RMB14.5 million in the Q2 of 2019 compared with RMB21.2 million in the prior year period. Our adjusted operating income for the first time turned to positive from an adjusted operating loss of RMB204.6 million in the prior year period to RMB17.4 million in the Q2 of 2019. We achieved an adjusted net income of RMB52.6 million in the Q2 of 2019 in comparison to an adjusted net loss of RMB221.9 million in the same period of 2018. Please note that our adjusted net income excludes share based compensation expenses, share of gain or loss in equity method investments and impairment loss of investments. For the Q2 of 2019, basic and diluted net income per ordinary share was RMB0.86 and RMB0.82 respectively, compared with a basic and diluted net loss per ordinary share of RMB28.07 and RMB28.07 respectively in the prior year period. For the Q2 of 2019, adjusted basic and diluted net income per ordinary share was RMB4.51 and RMB1.91 respectively for the Q2 of 2019 compared with adjusted basic and diluted net loss per ordinary share of RMB27 point 25 and RMB 27.25 respectively in the prior year period. To accelerate our business organic growth, we completed our initial public offering in July 2019 and received US489.9 million dollars in net proceeds after deducting the underwriting discounts and commissions and estimated offering expenses payable. Our successful IPO under NASDAQ is an important milestone for our company to date and represents another crucial step for us on the path to building a truly dynamic and sustainable growth company. Going forward, we will continue on strengthening our value proposition in the game centric live streaming industry as well as exploring both the upstream and downstream of Esports value chain. We will continue to drive our revenue growth through user base expansion, paying ratio enhancement and app improvement. We will also further optimize our operational efficiency and operating leverage to improve our margins. We aim to create long term value for our shareholders. Taking into account our growth plan and monetization capabilities, we expect our total net revenues for the Q3 of 2019 to be in the range of RMB1.95 billion to RMB2 1,000,000,000. 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. Thank you. We will now begin the question and answer session. Our first question today will come from Li Zhang of Bank of America Merrill Lynch. Please go ahead. I will translate myself. Congrats on a strong set of results. My question is mainly regarding game streaming industry. What's the management view on the competition from short video players such as Kuaishou? Do you see any impact to our business? And will this change the competitive landscape of game streaming industry? Secondly, how do you look at the user time of game streaming industry? Do you see the user growth of game streaming to slow down in the coming years? And what is our MAU expectation on both total MAU and mobile MAU for this year? Thank you. Okay. Regarding your question on Kuaishou, we believe the game live stream market currently has enormous growth potential and we welcome Kuaishou's presence in the market and we believe it will bring in the new users and mostly of which are penetrated in the lower tier cities. And we believe Kuaishou's presence game live streaming might affect the industry competitive dynamic or landscape to some extent, but we don't take Kuaishou as a direct compete for the following reasons. From content and user quality perspective, we are more focusing on creating high quality game content, majority of which are hardcore esports game content. And therefore, we attract the most hardcore users in the game live streaming market with high quality and user stickiness. And also, for example, our iOS users account for over 40% of mobile paying users and around 50% of our users are located in 1st and second tier cities. So these type of users have higher consumption capability and life cycle value. So we believe the user overlap between us and Kuaishou is minimal. So regarding your second question on the time of the game live streaming space, we believe currently the live streaming business is about conversion, which means to convert the gamers into live streaming viewers and users of our platform. So it takes time for the conversion to happen. We expect that the user conversion to be long term permission for us, while the speed of this user conversion could be impacted by a number of short term factors during the process. So therefore, we believe in the long run the game live streaming industry would maintain a steady growth trajectory. And going forward future launch of blockbuster games will accelerate the conversion of the new game new gamers and continue to drive the strong growth trajectory of the industry. So if you ask me about the expectation on future user growth, I believe in near to long term, it will still be a steady growth trajectory, but I can't really quantify it for now. Our next question will come from Daniel Chen of JPMorgan. Please go ahead with your question. So I will translate myself. So first of all, congratulation on a very strong quarter. My question is related to the Lucky Draw feature on live broadcasting platform. So I would we know that I would say that this is user engagement. But just wondering, is there a potential regulatory risk related to such Lucky Draw feature? And meanwhile, we also noticed that there are some other live broadcasting platform. They have regulated function recently. So just wondering will Douyu follow such procedure? And if so, what's the revenue implication if we just suspend such a lucky draw feature on our platform? Thank you. So regarding your question on Lucky Draw, we believe the Lucky Draw or the quiz feature was firstly launched by other live streaming platforms in 2016 and has been existing in the industry around 6 years. The reason why some platforms took their quiz kind of products offline previously was because it was regarded with high regulatory risk. And after vacation, the product got online again. So we believe so far all the major live streaming platforms have similar credit business. So before any of our products get online, we make sure that all of our products are fully compliant with the current like regulatory requirements. So our internal legal department do several rounds of check before we get the products online. And we are also closely monitoring any regulatory update from the government authorities and we keep a frequent communication with the Chinese regulatory bodies to make sure that we are complying with any recent regulatory requirements. And moreover, the quiz products are designed to increase the user interaction instead of achieving monetization. So through participating in quiz, the connection between the fans and the air streamers become more close. And it's really difficult for us to break down revenue contribution from Christmas. Okay. Thank you very much. Thank you. Our next question today will come from Hillman Chan of Citigroup. Please go ahead. So I have two questions. The first one is on the non gaming content for the including talent shows and entertainment content. So could management share more color on the growth strategy for the MAU, the paying ratio as well as the ARPU, perhaps in the context of upcoming features under development and also the cooperation with talent agencies? And my second question is on our operation and content strategy. How are we differentiated from other competing platforms including Huya and Penguin Esports and so on? Thank you very much. Okay. Regarding your first question on talent show and entertainment business, we are currently focusing on user base expansion. So for these two segments, we already have a very sophisticated business model in place. And previously, we were more following a Twitch model towards the game live streaming, but currently, we are also cooperating with talent agency to improve our monetization efficiency. Regarding your second question on our differentiation with Huya, we believe both of us and competitors are working on the game live streaming space. So we don't foresee a very big gap in terms of content or positioning. And our next question will come from Alex Poon of Morgan Stanley. Please go ahead. The reason of a decline in revenue growth quarter over quarter is because of our better than expected first and second quarter results. Although the implied quarter over quarter revenue growth is not significant, we are still implying a 90% to 95% year over year growth, which demonstrates that we are still growing our business at a very fast pace during this quarter. So we believe it takes time for our new users to cultivate their spending habit. In the Q1, we successfully increased our quarterly paying users from 4,200,000 to 6,000,000. And in this quarter, we managed to increase ARPU from RMB226 to RMB 256. So both data show that our monetization method are effective. That being said, both paying ratio and ARPU will have a stacked or stabilized growth trajectory instead of linear growth, given it takes around 1 to 2 quarters to cultivate user spending habit. So through the continuous optimization of our small amount 50 model through the fan system, we expect to see our monetization to generate more growth potential in the future. Our next question will come from Ken Zhang of Jefferies. Please go ahead. I'll translate myself. The first question is about the differences between the PC and mobile paying users. How does the monetization capabilities compare between these two channels? How would the revenue and paying user contribution be like in this quarter? And my second question would be on overseas expansion. Do we have any subject in mind towards the second half? And do you have any MAU target for this? Thank you. Okay. Regarding your first question on the user behavior difference between mobile and PC end, we are seeing more spending behavior to take place on mobile and also higher paying ratio for mobile? And regarding your second question, we are currently evaluating investment opportunities in the overseas market, including a potential collaboration with local parties. But for the near term, we expect it to not have a significant impact on our profitability. Ladies and gentlemen, this will conclude our question and answer session. At this time, I'd like to turn the conference back over to management for any closing remarks. Thank you, operator. 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. Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation and you may now disconnect your lines.