Earnings Transcript for DOYU - Q1 Fiscal Year 2023

Operator: Good morning and good evening, ladies and gentlemen. Thank you, and welcome to DouYu International Holdings Limited's First Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] I will now turn the call over to the first speaker today, Ms. Lingling Kong, IR Director at DouYu. Please go ahead, ma'am.

Lingling Kong: Thank you. Hello, everyone. Welcome to our first quarter 2023 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 fourth quarter 2023 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 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 inventor circumstances after the date of this conference call. I will now speak on behalf of our Chairman and CEO, Mr. Shaojie Chen. In 2023, we plan to continue implementing our core growth strategy of building a comprehensive game centric content ecosystem and to prioritize our focus on fostering a vibrant and healthy gaming community. In the fourth quarter, we made persistent efforts to produce premium gaming content and highlight our platform's gaming features by refining our operations and optimizing community actions. These initiatives continue to lay a solid foundation for our long-term sustainable development. With that in mind, we proactively adjusted our revenue generation and marketing strategies with a sharp focus on enhancing our user quality and maintaining stable business performance. In the fourth quarter, our mobile MAUs were 50.2 million with the total number of paying users at 4.5 million, and our adjusted net profit was RMB25.8 million. To begin with, our average mobile MAUs for the quarter were 50.2 million, a year-over-year decline of 8.9%, which was in-line with our expectations. The main reasons for the changes include

Hao Cao: Thank you, Lingling. Hello, everyone. In the first quarter, based on our refined strategy to achieve healthy and balanced growth, we focused on the development of healthy margin business and operations. With our further adjustments to revenue generating activities and reduced our marketing spending, we generated an adjusted net profit for the quarter amid the short-term impact on revenues. Let's now look at our financial performance in more detail. Total net revenues in the first quarter of 2023 decreased by 17.4% year-over-year to RMB1.48 billion. Live streaming revenues were RMB1.37 billion, a decrease of 20.7% from RMB1.73 billion in the same period of 2022. The decrease was mainly attributable to continued operational adjustment on live streaming revenue. such as significantly reducing low-margin promotional activities on virtual gifts. As a result, those adjustments impaired willingness to pay of new paying users and price-sensitive paying users together with decreased user base cost by reduced marketing spending, resulting in a year-over-year decrease in the number of paying users. However, the paying behavior of our core paying users remains relatively stable, leading to a year-over-year increase of 16.5% in quarterly up to RMB314 in the first quarter, up from RMB270 in the same period last year. Advertising and other revenues were RMB114.1 million, an increase of 66.6% from RMB68.4 million in the same period of 2022. The year-over-year increase was primarily attributable to the increase in other revenues contributed by game-specific membership services. Cost of revenues in the first quarter of 2023 was RMB1.31 billion, a decrease of 15.8%, compared with RMB1.55 billion in the same period. Revenue sharing fees and content costs decreased by 19.1% to RMB1.08 billion from RMB1.34 billion in the same period of 2022. The decline was primarily driven by the following two factors

Operator: Thank you. [Operator Instructions] Our first question comes from Lei Zhang from Bank of America. Please go ahead.

Lei Zhang: [Foreign Language] Thanks management for taking my questions. Two questions here. Firstly, we know that the core user group is key to our platform. So, can you help us to understand our core user group and how we can maintain and expand our core user group? Secondly, we know that we have many new games launching this year. So do you say this new day can drive our user and the streaming business? Thank you.

Shaojie Chen: [Foreign Language] Users constitute the most valuable resources on our platform. Core users refer to users who have high level of engagement and activity with long-view hours and high retention rates. They are basically game users who have paid a key role in building the gaming community on our platform. They are also the foundation of our business development. As such, we have kept upgrading our content and product formats based on changes in users' needs. We have also taken various measures to maintain our core users while acquiring new users through an enhanced platform ecosystem. [Foreign Language] First of all, we value content quality and user experience. That's why we have continuously optimized our product features and interface and strengthened our platform's game attributes to enforce our appeal to users. We have continued to invest in content upgrade, establishing a multi-layered gaming content system covering official tournaments, self-produced tournaments, and programs. Meanwhile, we met users' needs for long-term fragmented and interactive content through different content formats such as live streaming, videos, and communities, respectively. [Foreign Language] Second, regarding product format, we optimize our video and community access based on users' habits. We also changed the content display priority in different game segments according to game characteristics and user preference to facilitate content consumption. Notably, in game segments such as LoL Teamfight Tactics and [indiscernible] impacts. Video content such as game strategies has a higher viewership compared to traditional game segments. In the newly launched [X party segment] [ph] users can team up through our community channels, leading to stronger user engagement and appeal in this channel than in traditional game segments. [Foreign Language] Third, we strengthened our user operations and services, enhancing our user experience and stickiness through personalized recommendations and innovative services. For example, for users with continuous consumption habits or for our streamers, we recommend platform-wide membership to fortify their interactions with streamers. As for users who play games, we roll out game-specific membership services to meet their needs for in-game items. Therefore, based on the data we have accumulated over the years, our efforts have ensured our core user satisfaction and stickiness, thereby maintaining user loyalty in the long run. The stability of our core users is not only the foundation of our gaming community, but also the starting point of our exploration for new growth models that can benefit the long-term healthy development of our platform.

Hao Cao: Let me answer your second question about the new game. As the approval for new game titles resumed at the beginning of this year, casual games have been gaining popularity. The public testing prelaunch promotions and official launch of some large-scale games have given us more opportunities to attract users through higher quality new game content and innovative platform operations. [Foreign Language] As is our casual game with strong social attributes, we enhanced our community channel operations, encouraging users to team up through our community kind of in. Another example is VALORANT FPS game to be launched soon for domestic market as users typically enjoy watching such competitive games, we produce a highly engaging tournament content to attract the attention of both streamers and users. Thanks to our high-quality streamer pool and [sell producer] [ph] tournaments, users viewing time grew significantly in the VALORANT segment after the opening for domestic pre-registration. On top of providing streamers and content offerings, which is our common practice for new games, we also offer suitable gaming content and display formats based on game characteristics. In addition, we work with game developers to acquire more new gamer benefits and promote the games in conjunction with our platform's game content. In this way, new games can attract more new users in the early stages of the launch, among the games to be launched this year. We believe Honkai, DouYu, and Justice Online Mobile will be the focus of our operations. As Honkai [indiscernible] is not a great fit for live streaming compared with competitive games, we leveraged it SCG attributes for content operations, such as the inviting popular LL players who are also fans of [indiscernible] impact to showcase the new game of live streaming. We also launched a game Q&A challenge in our community channel to inspire user interactions. Although we cannot accurately predict the schedule for the game scotch, we have already conducted a detailed evaluation of the new games. And accordingly, we have made through [indiscernible] for their operations. This is to ensure that we can quickly deploy and integrate resources upon the games launch and provide promotional and operational support, thus seeing the opportunity to acquire more users during the game's promotional phase. Thank you. Please next question.

Operator: The next question comes from Thomas Chong from Jefferies. Please go ahead.

Thomas Chong: [Foreign Language] Thanks management for taking my question. So, my question is that, so in recent years, we have made some adjustment on operational strategies. So, how should we measure or evaluate the effectiveness of new strategies? Thanks.

Shaojie Chen: [Foreign Language] As we face a consistently evolving industry landscape and more diverse gaming consumption needs, we are prioritizing long-term sustainable development as a leading game-centric content platform in China. While stabilizing and optimizing our traditional business, we are also exploring new business growth opportunities. Speaking of our traditional game live streaming business, we are seeking to improve user quality, while also pursue growth in user scale. By delivering high-quality content, upgrading our product structure, and strengthening our inactive features, we've been able to enrich our platform's game-centric community ecosystem and enhance our user experience and retention rate. I will elaborate on the strategic adjustments we made over the past years and still ongoing, along with discussing the effectiveness of our valuation metrics. [Foreign Language] First, I will discuss changes in our user acquisition strategy. At present, the scale of China's gaming market is essentially stable, given users involving needs in the current market. The ROI of channel promotion has been declining. As such, we stick to accounting-driven approach to growth by continuously investing in high-quality content and cooperating with game developers to acquire new users. We've also built a diverse product system to meet user different needs and enhance user stickiness, gradually forming a positive cycle of content production and user growth. The most straightforward metrics for improvements in our ecosystem include user activity, time spent, and retention rate. [Foreign Language] Second, on the revenue front. Over the period of time, we reduced our marketing activities that target revenue growth. The purpose is to improve our platform's consumption ecosystem and make it easier and more likely for users to engage in paying behavior in order to promote our platform's long-term healthy development. Regarding our traditional virtual gifting business, we further reduced low ROI investments during the fourth quarter, such as various promotions and developed products more suitable for current consumption trends. While adjusting our virtual gifting revenue mix, we also optimize our cost and expense structures. As a result, with virtual gifting still our major source of revenue, we focus on revenue stability and improvements in both gross margin and adjusted net margin. [Foreign Language] Third, in terms of exploration of new monetization models, we export value-added services that can consistently satisfy gamers' needs with a focus on platforms game attributes. For example, based on our user cohorts, we launched our platform membership business with companionship oriented products and the game membership services for gaming users. This unique and sustainable products cannot only bring new users to our platform, but also improve our revenue structure. Although the current revenue contribution of membership services is relatively small, we believe it has a great potential, and it has demonstrated the possibility of our new models. On the whole, compared with revenue and expense adjustment, it will take time and patience for our content investments and new model exploration to pay-off with improvements in our operations. Accordingly, with revenue scale expansion under pressure in the short run, we will focus more on refined operations and cost and expenses controls to maintain our long-term profitability as we continue to make the adjustments mentioned earlier. Thank you. Next question please.

Operator: Next question comes from Ritchie Sun from HSBC. Please go ahead.

Ritchie Sun: [Foreign Language] Thank you for taking my questions. I have two. So, first of all, can – though you actually have resumed the procurement of LPL, can management share how does the return of this tournament contribute to the platform? Second of all, can management share our MAU, as well as paying usage trends for this year? Thank you.

Hao Cao: Let me answer your first question about tournaments. We believe the core copyright terms as tier of great value. And as price levels gradually returned to a reasonable range, we repurchased some core copy right tournaments in 2023, such as the LPL and the LoL World Championship tournaments. While LPLs retain brought us some incremental growth in traffic in the LoL segment, but it couldn't offset the decline in user scale resulting from significantly reduced promotional expenses. These developments were all within our expectations. It is worth mentioning that the tournaments retain [elevated] [ph] overall user activity in the LoL segment. There have been clear quarter-over-quarter improvements in average daily viewing hours and the number of operating chance per user. In particular, as mentioned in our CEO's remarks, this year, we leveraged our top-tier streamers and official tournament commentary for core streaming of the tournaments event. The topic covered in this live streaming session attracts the widespread attrition and entire discussions on our website. This demonstrated once again our enduring influence as an established game live streaming platform, even if we stopped live streaming from copyrighted tournaments for year.

Mingming Su: I will answer the second question about the user and paying user trend. Our operating strategy prioritizes its long-term sustainable development that is exploring growth from new businesses, while stabilizing and optimizing our traditional businesses. As our traditional businesses account for a large share of our total revenue, adjustments in these businesses will impact operational and financial performance of the whole platform. The most direct adjustments this year lie in our marketing strategy of user acquisition and live streaming activities. These adjustments affected our platform's user scale and our number of paid users, which explain the year-over-year and quarter-over-quarter decline in MAUs and paying users in the first quarter. A significant reduction of China promotional expenses was the main reason for the decline in MAUs. Our MAU performance in the first quarter was in-line with our expectations, namely most of the lost MAUs were short-term users from the platform. So, this strategy won't affect our content operations for our monetization efficiency. In comparison, our core user base has remained relatively stable. For instance, users with above average streaming hours have a retention rate that almost doubled the average retention rate and paying users next month retention rate exceeds the average rotation rate by over 50%. We will continue to execute our strategy of reducing China promotional expenses. On that basis, we expect MAUs in 2023 to remain on the same level as in the first quarter with more quarterly fluctuations. The decline in paying users is attributable to two factors. Whilst that adjustment in revenue-generating activities affected some users willingness to pay. The other is that the overall decrease in our user scale. Guided by the operating principle of improving its quality, we will devote more operational and other resources to maintaining our core paying user stickiness and willingness to pay through more interactive products and innovative membership services. So far, our paying user base has reached a relatively stable range. We believe our operational adjustments will allow us to concentrate our resource a content, which is more sustainable despite a longer payoff cycle. It will take time before we can see the results of these adjustments. Meanwhile, we have been following the progress and will provide updates in due course. Thank you. Next question.

Operator: The next question comes from Raphael Chen from Bank of China International. Please go ahead.

Raphael Chen: [Foreign Language] Thanks management for taking my question. I only have one question regarding the bottom line. Could management shed some color on the bottom line or margin outlook in the next few quarters? Thank you.

Mingming Su: Starting last year, as we kept adjusting the live streaming business to drive its healthy growth, overall operational efficiency has improved through fine-tuned operations and increasing ROI. We have achieved good results with our net loss has gradually narrowed in the first quarter by continuing to adjust and reduce our low-margin operations, we achieved net profitability and both non-GAAP and GAAP, echoing our goal of maintaining prudent operations in traditional business in 2023. Working towards this goal, we remain committed to executing our strategy of fostering a comprehensive game-centric content platform. We increased the investment in quality tournament content adding the capitalized LPL tournaments this year and continuing to invest in KPL tournaments and other top notch copyrights. Furthermore, we also actively promoted innovative businesses, such as game-specific membership services. To address increased costs of copyright and innovative business, we adopted a flexible approach to control of our costs through content management and strategic operations. Regarding revenue share fees, as we actively fostered a healthy and sustainable live streaming ecosystem and reduced low-margin operational activities, the overall revenue share ratio remained at the current low level. In terms of content costs, we strengthened content management and operations. On the one hand, we elevated the production efficiency of our self-produced content for ROI improvements. On the other hand, we reduced low-margin promotional activities. As a result, the cost of self-produced content and operational activities have been notably reduced year-over-year. On the whole, we expect overall cost of revenues in 2023 as a percentage of revenues to remain flat year-over-year. In terms of operating expenses, we adhere to a content-driven approach to user growth, mostly cutting our China-related user acquisition expenses, we expect a major reduction in full-year marketing expenses year-over-year. Meanwhile, we will actively optimize operating expenses and further refining our employee streamlining to improve operational efficiency. Cost control measures certainly helped us strengthen our traditional live streaming business. Leveraging on the competitive edge of traffic and gaming content, we build from our traditional live streaming business, we put more efforts on exploring and developing innovative growth avenues, which in turn supported our platform's long-term sustainable profitability and development. Thank you.

Operator: Thank you. That's all the time we have for questions. I will now turn the call back over to management for closing remarks.

Lingling Kong: On behalf of the management, thank you for joining our call. We look forward to speaking with every one of you next quarter.

Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.