DouYu International Holdings Limited (NASDAQ:DOYU) Q4 2022 Earnings Call Transcript

DouYu International Holdings Limited (NASDAQ:DOYU) Q4 2022 Earnings Call Transcript March 20, 2023

Operator: Good morning and good evening, ladies and gentlemen. Thank you, and welcome to DouYu International Holdings Limited’s Fourth Quarter and Full Year 2022 Earnings Conference Call. 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 fourth quarter and full year 2022 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 and full year 2022 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 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 events or circumstances after the date of this conference call. I will now speak on behalf of our Chairman and CEO, Mr. Shaojie Chen. Throughout 2022, against the backdrop of a complex and volatile macro environment, we remained committed to our long-term growth strategy of fostering a vibrant game-centric content ecosystem. We ended the year with a stable business performance achieved through a mix of operational adaptation and innovation that included optimizing our revenue structure, streamlining our operations, creating new services and enhancing monetization capabilities.

In the fourth quarter, we continued to produce premium gaming content, upgrade our content operating model adding to the interactive features on our platform to further enhance user engagement. Our mobile MAUs grew slightly on a sequential basis to 57.4 million during the quarter, with the total number of paying users of 5.6 million, and our adjusted net loss was RMB4.3 million. Due to a couple of strategic adjustments over the past few quarters, our ecosystem has been shown to be healthier, which we believe it will empower us to deliver long-term sustainable growth. As we progress further into 2023, we are continuing to enrich our content with community interaction playing halo in our ecosystem. We are shifting the focus of our user growth strategy from increasing scale to improving quality without being overly concerned about the short-term growth of our business.

Furthermore, we will optimize our marketing strategy to strengthen partnerships with game developers, coupled with our interactive gaming content community to enhance user engagement. In addition with the price level of corporate deployments gradually returning to a reasonable range, we believe that prudently purchasing some co-copyrighted tournaments will help us domain our own competitiveness in the industry. This investment will also foster the ecosystem of our game-centric community and enhance our core user engagement and retention rate, thereby facilitating the company’s long-term development. Next, I’d like to share with you our business updates from the fourth quarter in more detail. For Q4, our average mobile MAUs for the quarter were 57.4 million, a slight sequential increase despite the year-over-year decline of 8 points.

The main reason for the year-over-year and quarter-over-quarter MAU changes include: First, due to the implementation of our selective corporate procurement strategy in early 2022, we experienced a decline in all MAUs since the fourth quarter of the year. Nevertheless, in the fourth quarter, despite the negative impact on user traffic from the absence of the world — of the LoL World Championship Tournament, our creative user campaigns and operations on existing copyright tournament events effectively attracted and engaged our core users. As a result, mobile MAUs on our platform achieved growth for the third consecutive quarter. Second, we continue to advance our innovative membership business, extending our game-specific membership services to broader game segment.

By combined game features with users’ needs, this initiative has gained traction among both new and existing users. Moving on to our content ecosystem. Capitalizing on the widespread popularity of eSports, we continue to sharpen our products and operations, including the consistent upgrades of our game content. Based on gaming features, we continuously created an even broader selection of more interactive and engaging premium content. On top of that, we built a healthy and vibrant interactive ecosystem for users through innovative services, providing them with the community-based platform and a novel membership business. These efforts cannot only ensure long-term retention by meeting certain gamers’ needs for upgraded game content, but also increase overall user engagement and stickiness on our platform, that’s driving user growth in the long run.

In the fourth quarter, we continued to improve our diversified self-produced tournament system and organized more than 90 eSports tournaments. Leveraging our top-tier streamer resources, we focused on promoting IP content in partnership with star game streamers. In this effort, we created a series of premium gaming content combined with entertainment-oriented activities in our game segment, such as League of Legends and Honor of Kings. This content in general, coupled with the joining parties, has proven to increase users’ motivation to engaging interaction and the line-up of our game communities, appealing to both new and existing users. Self-produced tournaments have become one of our main avenues to promote eSports popularity across the board.

For example, based on Honor of Kings large gamer base, we housed Honor of Kings user cup national challenge. This competition opened enrollment to all Honor of Kings players and both its easy access to rewards and wider user participation. Specifically, we integrated the tournament’s content with our user community. Users were able to enroll, participate and advancing rank within our community channel, while other users could take part in a series of fun activities such as a single player competition and interactive reward. Combining game content with our user communities captivated mind-like gamers. And at the same time, it has tightened bonds with heavy users. As we improved our self-produced tournament system and further enhanced its value, we launched a series of eSports partner selection mechanism based on these tournaments.

In the user cup mentioned earlier, we unveiled the eSports project. We’ve seen growth opportunities to discover high potential streamers and fortify user segment. In the fourth quarter, we launched all new eSports school team selection season for colleges. The competition covered three mainstream eSports games and attracted more than 2,000 college teams from 11 provinces, providing more college for spend with the platform to showcase their skills. It has also helped us to discover potential sports talent and enhanced stores appeal and brand influence among college and university. In terms of corporate detergents, we reinforce user engagement and stickiness to reach derivative content and diverse operation activities. In the Honor of Kings Champions Cup KIC, we added auxiliary functions such as home team support and watching reminder to further elevate our user experience.

Moreover, the team, Wuhan.eStar, which we signed and invested in, maintained its excellent performance throughout the year and became the champion of the Champions Cup. With the purchase of some co-copyrighted content, we continue to deepen cooperation with game developers, fully integrating tournament content with our platform’s operational characteristics to provide differentiated tournament derived content and customized user services. Meanwhile, aligning with the tournament’s content, we will explore more commercialization channels to improve the ROI of tournament’s copyright. Moving on to our monetization strategy. Our total number of paying users in the fourth quarter was 5.6 million with a quarterly average ARPU of RMB293. We continued our paying user segmentation strategy from last quarters, which included canceling marketing activities for new paying users with low rates of returns, maintaining our core users’ readiness to pay and promoting more consumption of mid-range payment users.

We also made progress in generating revenue from non-virtual gifting. For Q4, we continued to refine and promote our platform-wide membership service system, strengthened the companionship and interaction between streamers and platform members and consistently iterated membership features. In the fourth quarter, we launched sound effects and privilege gifts for members, leading to a sustained, steady increase in members renew rates compared with the third quarter, demonstrating high user stickiness among our fans. Furthermore, we extended our game-specific membership service to multiple segments. Based on the characteristics of each game, we launched customized game membership services to meet users’ needs for in-game item. Going forward, we will strengthen our cooperation with game developers that fit into users’ gaming needs and explore more commercialization channels.

In terms of our product R&D and function innovation, we continue to deepen cooperation with game developers. In compliance with laws and regulations and based on our partial game-based sharing partnership with game developers, we integrated gaming data, content and function with DouYu’s content and gameplay, making live streaming content close fit with these games. For example, the Honor of Kings live streaming channel, users can easily team up with streamers and other users to play the game through the join with one-click function, making user streamer interactions significantly simpler than before. In the past, users had to manually add friends into the game to form teams. In addition, with this excited more game-related data and gaming strategies through partial game data sharing in games such as and Peacekeeper Elite, further optimizing our user experience and stimulating live streaming engagement.

Overall, in a challenging year of 2022, we created a healthy and vital gaming content ecosystem through various operational strategies, including adjusting revenue-generating activities and increasing investments in self-produced content, thereby maintaining stability in the company’s overall business and financial performance. Going forward, we will continue to execute on our diversified game-centric content strategy and focus on maintaining the scale and quality of our core users, by further improving game content and strengthening our connection with core users where we enhance user segment on our platform and as a gaming content ecosystem. Meanwhile, we will continue to explore more commercialization channels and new growth avenues to maintain our leading position in the domestic game live streaming industry.

With that, I will now turn the call over to our Vice President of Finance, Mr. Hao Cao, to go through the details of our financial performance in the quarter.

Hao Cao : Thank you, Lingling. Hello, everyone. For the full year 2022, we focused on optimizing cost and developing revenue quality in order to improve financial performance. As we continue to invest in high-quality self-produced content and improve our revenue structure, we enhanced operating efficiency through adjusting our live streaming business, together with effective cost and expense controls. For the full year 2022, our gross margin expanded to 13.9% and adjusted net loss narrowed significantly to RMB7.6 million. Let’s now look at our financial performance for the fourth quarter in more detail. Total net revenues in the fourth quarter of 2022 decreased by 27.8% year-over-year to RMB1.68 billion. Live streaming revenues were RMB1.6 billion, a decrease of 27.7% from RMB2.21 billion in the same period of 2021.

The decrease was mainly attributable to two factors: our continued implementation of prudent operating strategies and the one-off impact of a decline in streamers’ activities following the end of COVID-19 restrictions. As a result, virtual gifting interactions were partially impaired, which caused a year-over-year decrease in quarterly ARP. Our quarterly ARP was RMB293, down 4%, from RMB305 in the same period last year. Advertising and other revenues were RMB84.3 million compared with RMB118.5 million in the same period of 2021. The year-over-year decrease was primarily attributable to the soft demand for brand advertising amid the challenging microeconomic environment. The decline was partially offset by increase in other revenues contributed by game-specific membership services.

Cost of revenues in the fourth quarter of 2022 was RMB1.5 billion, a decrease of 28.2% compared with RMB2.08 billion in the same period of 2021. Revenue sharing fees and content costs decreased by 31.2% to RMB1.27 billion from RMB1.85 billion in the same period of 2021. The decline was primarily driven by the following two factors: First, the decrease in revenue sharing fees was mainly in accordance with the decrease in live streaming revenues. In addition, the lower revenue sharing ratio, which was achieved through the implementation of our prudent operating strategies, led to a further reduction in revenue sharing fees. Second, the copyright cost decreased significantly as a result of our selective copyright procurement strategy, whereby we seized acquiring overpriced content rights for eSports tournaments.

The decrease was partially offset by an increase in self-produced content costs, driven by additional year-end events launched during the quarter. Bandwidth costs in the fourth quarter of 2022 decreased by 17.6% to RMB138.4 million from RMB167.9 million in the same period of 2021. The decrease was mainly due to the year-over-year reduction in peak bandwidth usage in the absence of the purchased copyright of major eSports tournaments. Gross profit in the fourth quarter of 2022 was RMB186.1 million compared with RMB244.7 million in the same period of 2021. Gross margin in the fourth quarter of 2022 was 11.1% compared with 10.5% in the same period of 2021. This margin improvement was mainly driven by the decrease in both revenue sharing fees and copyright costs as a percentage of revenues.

The improvement was partially diluted by the rising percentage of revenues attributed to self-produced content costs. Sales and marketing expenses in the fourth quarter of 2022 were RMB123.9 million, a significant decrease of 45.9% in from RMB229.2 million in the same period of 2021. This was mainly attributable to a decrease in both marketing expenses for user acquisition and branding expenses. Research and development expenses in the fourth quarter of 2022 were RMB80.6 million, representing 39.2% decrease from RMB132.6 million in the same period of 2021. This decrease was primarily due to a decrease in personnel-related expenses. General and administrative expenses in the fourth quarter of 2022 were RMB55.2 million, a drop of 44.1% from RMB98.8 million in the same period of 2021.

The decrease was primarily due to decreased share-based compensation expenses as the vast majority of shares and our share incentive plans were fully vested as well as decreased professional service fees. Adjusted operating loss, which adds back share-based compensation expenses, was RMB56 million in the fourth quarter of 2022 compared with RMB168.7 million in the same period of 2021. Net income in the fourth quarter of 2022 was RMB41.8 million compared with net loss of RMB193.2 million in the same period of 2021. Adjusted net loss which excludes share-based compensation expenses, share of loss or income in equity method investments and impairment loss of investments was RMB4.3 million in the fourth quarter of 2022 compared with RMB150.7 million in the same period of 2021.

For the fourth quarter of 2022, basic and diluted net income per ADS were RMB0.14 and RMB0.14, respectively, while adjusted basic and diluted net loss per ADS were RMB0.003 and RMB0.003, respectively. As of December 31, 2022, the company had cash and cash equivalents restricted cash, and short-term and long-term bank deposits of RMB6.81 billion compared with RMB6.64 billion as of December 31, 2021. Moving forward, as part of our strategic focus on healthy long-term growth, our revenue may experience some immediate impact, which we believe is critical to our balanced growth. We will also strive to explore more commercialization channels and fine-tune our operations, supporting the sustainable long-term development of our platform, while also delivering greater value for our shareholders.

This concludes our prepared remarks for today. Operator, we are now ready to take questions.

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Q&A Session

Operator: And our first question today will come from Lei Zhang of Bank of America Securities.

Lei Zhang : Thanks for management for taking my question. My first question is mainly on your strategy. We noticed that you have invested in eSports contract this year. Can you share with us your strategy for 2023? And how should we deliver — operating efficiency will have additional in-content cost? Secondly, we noticed that attraction this year and can you share with us its performance in live streaming? And we also know that there are more new games to be launched this year. Will those games help our user growth and game streaming involvements?

Shaojie Chen : As a leading game live streaming platform in China, we remain committed to our long-term growth strategy of fostering a vibrant game-centric content ecosystem. We continue to establish a diversified gaming platform by streamlining our operations and creating new services, propounding a vibrant game content ecosystem. Facing the ever-changing macro environment in the past two years, we’ve made some adjustments to pursue long-term sustainable development. Those adjustments include us actively modifying our operating strategy to optimize our revenue structure and controlling business spending through fine-tuned operations. All the measures we’ve taken have not only stabilized the overall company’s business, but also improved our financial performance, and significantly narrowed our adjusted net loss for the full year 2022.

Looking ahead to 2023, we will continue to execute prudent operational strategies and focus on the long-term business process. We will reduce our investment in traditional business lines with low ROI and focus on exploring new growth avenues. While pursuing growth in user scale, we will target improving user quality. By delivering high-quality content, upgrading our product structures and strengthening our interactive features, we are able to enrich our platform’s ecosystem so that we can enhance our user experience and retention rate. In terms of cost allocation, we conducted a detailed evaluation of the ROI of each of our expenses in allocated company’s resources rationally and dynamically, dedicating limited resources to business lines with greater potential.

For example, in terms of our user acquisition strategy when we compare it with content-driven user acquisition, we noticed that channel promotions drove user growth in the short term, but with lower retention rate and conversion rate. As users’ needs have becoming — become more diversified, focusing on channel promotion is no longer a sustainable user acquisition strategy. Therefore, we have adjusted our overall marketing strategy in 2023, adhering to a content-driven approach to growth by continuously investing in high-quality content and cooperating with game developers to attract and engage users. Although investing in game — in content is a more long-term process than channel promotion. We believe it’s beneficial for our platform’s sustainable development.

In terms of our co-copyrighted procurement, as we mentioned before, our copyright tournaments are still of great value, and we would repurchase some co-copyrighted tournaments if the price level return to a reasonable range. On that basis, we repurchased some co-copyrighted events in 2023, such as the LPL and the LoL World Championship Tournament. High-quality streamers content, diversified and self-produced game-centric content along with copyrighted tournament content enable us to enrich our content ecosystem and foster our game-centric community, thereby solidifying our overall competitiveness in the industry. Meanwhile, in terms of revenue, we will focus on ensuring that our users’ willingness to pay on our platform is on a sustainable basis.

Such focus shift will have a short-term impact on our revenue. However, our operating leverage is expected to improve in the long run, which, in turn, supports the company’s long-term profitability. At the same time, we are continuously exploring more innovative commercialization avenues.