Earnings Labs

DouYu International Holdings Limited (DOYU)

Q2 2019 Earnings Call· Tue, Aug 13, 2019

$4.97

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Transcript

Operator

Operator

Good morning, and good evening, ladies and gentlemen. Thank you, and welcome to the DouYu International Holdings Limited Second Quarter 2019 Earnings Conference Call. [Operator Instructions] I will now turn the call over to the first speaker today, Ms. Mao Mao, IR Director of DouYu. Please go ahead, ma'am.

Mao Mao

Analyst

Hello, everyone. Welcome to our second quarter 2019 earnings call. Joining us today are Mr. Shaojie Chen, Chairman and Chief Executive Officer; Mr. Mingming Su, Chief Strategy Officer; and Mr. Hao Cao, Vice President of Finance. You can refer to our second quarter of 2019 financial results on our IR website at ir.douyu.com. You can also check a replay of this call when it becomes available in a few hours on our IR website. Before we start, please note that this call may contain forward-looking statements made pursuant to the safe harbor provision of 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 known 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.

Shaojie Chen

Analyst

[Foreign Language]

Mao Mao

Analyst

[Interpreted] Hello, everyone. Welcome to our second quarter 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 RMB 1.87 billion. Our gross profit increased by 823.8% year-over-year to RMB 301 million, with gross margin expanding to 16.1%. Our adjusted net income reached RMB 52.6 million with an adjusted net margin of 2.8%. The average total MAUs in the quarter increased by 32.6% year-over-year to RMB 162.8 million while the average mobile MAUs increased by 42.5% year-over-year to $50.6 million. Our quarterly paying users reached 6.7 million implying a year-over-year growth of 123.3%. In the second quarter, 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 second quarter was driven by our continuous efforts to upgrade our product functionality and the user interface, such as the instant turndown feature, which enhances user experience on our mobile app. As the user bandwidth cost of 4G networks gradually declined, we saw the number of users watching streaming content through 4G hotspot. The average mobile MAUs who visited our app through our 4G network increased by 39% year-over-year. With the increasing popularity of 4G and the coming launch of 5G 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 second quarter, our average PC MAUs increased by 28.5% year-over-year to 112.2 million, mainly driven by the improving penetration and rising popularity of eSports games such as DNF, CS:GO and TFT. These…

Hao Cao

Analyst

Thank you, Shaojie. Hello, everyone. Please let me go through our second quarter financial results. Due to our continuous efforts in growing our user base, enriching and improving the quality of content, cultivating users paying heavies as well as broadening our brand awareness. Our total net revenues increased by 133.2% year-over-year to RMB 1.87 billion in the second quarter. Improvements to both our paying user base and ARPU drove our live streaming revenues to RMB 1.71 billion in the second quarter of 2019 representing 156.0% year-over-year growth. During the second quarter, 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 21.2% to RMB 164.4 million in the second quarter of 2019 from RMB 135.6 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 costs increased at a slower pace relative to our revenue growth in the second quarter of 2019. During the quarter, cost of revenues increased rapidly by 104.0% to RMB 1.57 billion from RMB 770.3 million in the prior year period. Revenue sharing fees and content costs increased by 121.2% to RMB 1.33 billion from RMB 599.8 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 invest in quality content production by the platform and content rights to broadcast eSports-related content. Bandwidth cost increased by 15.2% to RMB 153.3 million from RMB 133 million in the prior year period, which was primarily due to the growth in our user base and increase in user engagement on…

Operator

Operator

[Operator Instructions] Our first question today will come from Lei Zhang of Bank of America Merrill Lynch.

Lei Zhang

Analyst

[Interpreted] I will translate myself. Congrats on a strong set of results. My questions 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 TAM 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?

Shaojie Chen

Analyst

[Foreign Language]

Mao Mao

Analyst

[Interpreted] Okay, regarding your question on Kuaishou, we believe the game live streaming 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 in 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 reason from content and user quality perspective, we are more focusing on creating high-quality game content, majority of which are hard-core 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 first 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.

Shaojie Chen

Analyst

[Foreign Language]

Mao Mao

Analyst

[Interpreted] So regarding your second question on the TAM 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 the user conversion to be a long-term mission 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 game will accelerate the conversion of the new gamers and continue to drive the strong growth trajectory of the industry.

Shaojie Chen

Analyst

[Foreign Language]

Mao Mao

Analyst

[Interpreted] 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.

Operator

Operator

Our next question will come from Daniel Chen of JPMorgan.

Qi Chen

Analyst

[Interpreted]. So I will translate myself. So first of all, congratulations on a very strong quarter. My question is related to the lucky draw feature on live broadcasting platform. We know that -- I would say that this is a function that's very common on live broadcasting platforms. And I think it could actually help to increase the user engagement. But just wondering, is there a potential regulatory risk related to such a lucky draw feature? And meanwhile, we also noticed that there are some other live broadcasting platforms, 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?

Shaojie Chen

Analyst

[Foreign Language]

Mao Mao

Analyst

[Interpreted] So regarding your question on lucky draw, we believe lucky draw or the quiz feature was firstly launched by other live streaming platform in 2013 and has been existing in the industry for around 6 years. The reason why some platforms took up this kind of product offline previously was because it was regarded with high regulatory risk and after rectification, the product got online again. So we believe so far, all the major live streaming platforms have similar quiz business.

Shaojie Chen

Analyst

[Foreign Language]

Mao Mao

Analyst

[Interpreted] So before any of our products gets online, we make sure that all of our products are fully complying with the current like regulatory requirements. So our internal legal department do several rounds of checks before we get the product online. And we are also closely monitoring any regulatory update from the government authorities, and we keep 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 streamers come more close. And it's really difficult for us to break down the revenue contribution from quiz business.

Operator

Operator

Our next question today will come from Hillman Chan of Citigroup. Hillman Chan;Citigroup Inc., Research Division: [Interpreted] So I have 2 questions. The first one is on the nongaming content for the -- including talent shows and talent entertainment contests. 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 and the 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?

Shaojie Chen

Analyst

[Foreign Language]

Mao Mao

Analyst

[Interpreted] Okay. Regarding your first question on talent show and entertainment business, we are currently focusing on user base expansion. So for these 2 segments, we already have a very sophisticated business model in place. And previously, we were more following a triage model towards the game live streaming. But currently, we are also cooperating with talent agency to improve our monetization efficiency.

Shaojie Chen

Analyst

[Foreign Language]

Mao Mao

Analyst

[Interpreted] Regarding your second question on our differentiation with Hoya we believe both of us and our competitors are working on the game live streaming space so we don't foresee a very big gap in terms of the content or positioning.

Operator

Operator

Our next question will come from Alex Poon of Morgan Stanley.

Chun Poon

Analyst

[Foreign Language]

Shaojie Chen

Analyst

[Foreign Language]

Mao Mao

Analyst

[Interpreted] 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.

Shaojie Chen

Analyst

[Foreign Language]

Mao Mao

Analyst

[Interpreted] So we believe it takes time for our new users to cultivate their spending habit, in the first quarter, we successfully increased our quarterly paying users from 4.2 to 6 million. And in this quarter, we managed to increase ARPU from RMB 226 to RMB 256. So both data shows that our monetization methods are effective. That being said, both paying ratio and ARPU will have stacked or stepwise 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 gifting model through the fan system, we expect to see our monetization to generate more growth potential in the future.

Operator

Operator

[Operator Instructions] Our next question will come from Ken Chong of Jefferies.

Ken Chong

Analyst

[Foreign Language] 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 2 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 project in mind towards the second half? And do you have any M&A target for this?

Shaojie Chen

Analyst

[Foreign Language]

Mao Mao

Analyst

[Interpreted] 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.

Operator

Operator

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.

Mao Mao

Analyst

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.

Operator

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation, and you may now disconnect your lines. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]