Sound Group Inc. (SOGP) Q3 2020 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen, thank you for standing by for Lizhi Inc.'s Third Quarter 2020 Earnings Conference Call. [Operator Instructions]. I will now turn the call over to your host, Effy Kang, Head of Capital Markets for the company. Please go ahead.

Thank you very much. Hello, everyone, and welcome to Lizhi Inc.'s Third Quarter 2020 Earnings Conference Call. We released our financial and operating results via newswire services earlier today, and they are available online. Participants on today's call will include our founder and CEO, Mr. Marco Lai; and our acting CFO, Ms. Chengfang Lu. Management will begin with prepared remarks, and the call will conclude with a Q&A session. As a reminder, this conference is being recorded. In addition, our earnings highlights presentation and the webcast replay of this conference call will be available on the IR section of our website at ir.lizhi.fm. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Secretive Litigation Reform Act of 1995. These statements typically contain words such as may, will, expect, target, estimate, intend, believe, potential, continue or other similar expressions. Forward-looking statements involve inherent risks and uncertainties. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, many of which factors are beyond our control. The company, its affiliates, advisers, representatives and underwriters do not undertake any obligation to update these forward-looking information, except as required under the applicable law. Please note that Lizhi's earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. Lizhi's press release contains a reconciliation of unaudited non-GAAP measures to unaudited GAAP measures. I will now turn the call over to our Founder and CEO, Mr. Marco Lai. Please go ahead.

Hello, everyone. Thank you for joining us today. Our healthy third quarter results amid COVID-19 normalization in China reflected our leading national position in the online audio sector. For the first time since going public, we achieved a non-GAAP quarterly profit, which is also a testament to the scalability and robustness of our business model. Our dedication to keep enriching and optimizing our content offering as well as leveraging high-quality user-generated content continues to drive user traction and engagement. We also introduced many more innovative features to further improve user experiences. In the third quarter, our monthly average user base grew by 21% year-over-year, reaching 56.2 million, and our monthly average paying user base increased by 17% year-over-year. Additionally, we saw a rebound in the average user spending, signifying the increasing value of our distinctive content ecosystem. The number of average monthly active content creators reached 6.15 million during the quarter. And thanks to our efforts to -- on driving interactions and engagement between content creators and users through audio entertainment features, the quarterly audio entertainment user penetration rate increased to 13.5% from 12.8% a year ago. Despite unprecedented challenges in the macro environment this year, our growth momentum reaffirms our ability to capture rising demand for high-quality digital audio experiences and audio interactions. Lizhi is at the forefront of the rapidly developing audio entertainment market by providing users with captivating listening experiences, driving creation of premium content and expanding user engagement opportunities. We are committed to unlocking the great potential of the online audio market to achieve our well-defined vision for the future. I will now discuss the key areas of focus during the third quarter. Firstly, we're continuously expanding and optimizing our extensive and diverse user-generated content portfolios to be well positioned for sustainable growth. As we have a strong emphasis on content creation and continue to execute the initiatives of our content strategy, the number of podcasts uploaded to our platform continues to grow rapidly. In the third quarter, with 19 million new podcasts uploaded to our platform, our cumulative number of podcasts reached 234 million as of September 30, 2020, representing a significant 46% increase over the previous year. In the quarter, we further enhanced content creation and optimized content genres through a number of initiatives. We further improved audio creation tools to support content creation. In addition to audio effects and beautification functions based on our audio-centric technology, now we provide more audio content templates on the platform, including audio recordings of celebrities and original user-generated materials. We refreshed our LIZHI App home page and further organized and launched representative genres. With a redesigned interface and navigation functions and cleaner and more simplified features, we improved the user exploration and listening experiences among wider platform offerings. We are pleased to note that a few of the new content genres, such as entertainment and celebrity and Lizhi premium, which presents exclusive collections of high-quality podcasts, have gained especially strong traction with existing and target users. In the quarter, we also diversified our content genre to bring in more content aligned with hot and trending topics. We are leveraging an array of creative operational campaigns and promotional activities to generate fresh and distinctive content from creators and to enhance the platform's appeal to users. For example, we launched live audio shows and produced podcasts in collaboration with a number of popular TV series and variety shows, such as Nothing by Thirty and The Coming One: Super Band, which created huge fan buzz and user interest. Each episode was played more than 200,000 times on average and reached more than 1.3 million times exposure. We also launched a campaign called Idol Show Today, in which we invited some of the most popular idols to share their stories and feelings on competition and to interact with their fans through voice. In our Going to Front Page campaign, we invited the content creators to produce high-quality podcasts based on different things. This encouraged mid- to long-tail content creators to be more engaged in and active on the platform, and we rewarded the best of them with increased user traffic and higher levels of exposure. Moreover, we launched a pilot playlist subscription program to leverage the growing premium audio content on our platform and further enhance our monetization capabilities. In the meantime, we are actively working on expanding our podcast business and strive to build the leading position of Lizhi in the Chinese podcast industry. In late September, we launched Echo Plan version 2.0, integrating online and off-line resources to support content creators in various aspects of operations, including upgraded commercialization service systems, industry podcast salons, traffic support plans and brand-new data analytic capabilities. We aimed to attract more new creators and improve content offerings in both quality and quantity. More than 50,000 podcast hosts participated in the first 30 days of this program. Recently, we hosted our first off-line podcast salon in Beijing and invited popular content creators in the podcast sector to share their creation experiences with podcasters. We plan to host more podcast salons along and related every month to establish effective channels of communication and build relationships with existing and future content creators. We believe these initiatives will help us captivate and nurture more talented creators to enrich our content offering. Another area of focus in third quarter involved enhancing user engagement, increasing the vitality of our user communities and strengthening the bonds between different users. In the quarter, we launched a variety of endorsement campaigns through which users can endorse the performance of their favorite content creators and help them grow on the platform. This enables creators to have more exposure and opportunities to interact with more users. We've seen that the hosts elected from the endorsement campaigns are more active in content generation and have a better engagement with audiences, which further elevates the virtuous cycle of our vibrant community. The campaigns also utilized our advanced AI technology to effectively and efficiently identify the high potential content creators. To build immersive audio experiences in our community and bring users closer together, we've created a subsite of microblogs where Lizhi users can post and interact with each other through a variety of social networking functions. Thanks to all these efforts to enhance user engagement and community vitality, the monthly total interactions reached a record high of 3.2 billion times in the third quarter. In addition, we've seen a closer integration of podcast and audio entertainment as users and content creators are increasingly active in both segments. Over 65% of our audio entertainment hosts were converted from podcast content creators, marking a year-over-year growth of 15%, indicating the higher participation of content creators across different segments of the platform. Moreover, we've hosted various campaigns to help podcast creators gain more attention in different segments. For example, in August, we hosted a Lizhi film festival and invited content creators to produce podcasts and share their stories about films through live streaming talk show. This kind of event has motivated podcast creators who had never tried the audio entertainment section before join the live streaming shows and have truly interactive and immersive audio experiences. They not only gained more followers for their podcasts through the event, some of them have even become audio entertainment hosts and interacted with their followers through various audio entertainment features. We believe innovative and interactive features have effectively strengthened the connection between creators and users and enabled podcast creators to attract more audiences. In addition to maintaining the business growth through various strategic initiatives, we are also exploring opportunities that will allow us to diversify our business model. Leveraging our massive content base and leading technology capabilities, we are deploying the in-car audio market and exploring the sizable market with great potential by collaborating with new energy vehicle producers. We believe this plan is of strategic importance for our further development and expansion in the online audio industry and will optimize the advantages and values of our audio content in diverse use scenarios. We will improve the user experiences, reach a broader user base and increase our user scale throughout years of the experiences and strength in audio technology and operations. We will cooperate with leading companies in the market, advance our in-car audio strategies and deliver a superior audio experience for our users. In terms of auto technology, we are dedicated to advancing the application of AI technology on our platform. Through big data analytics and machine learning, we continuously inspire in sports talented long-tail creators on our platform. Many newly joined high-potential content creators have gained a large number of followers and more attention in a short time with support of our AI-enabled recommendation system. In Echo Plan 2.0, we will further upgrade the data analytics center to help creators understand their creation ability and fan base from different dimensions. In addition, we established an AI-supported online audio content management mechanism to identify and deal with inappropriate content. This has improved our content controllability and enhanced our operating efficiency besides the quality improvements of content. In the future, we will continue to develop cutting-edge technologies, such as artificial intelligence, to empower the content creators and business development. In conclusion, we will continue to making efforts to create value for our users, maintain our leading position in China's online audio industry and capture the tremendous growth opportunities of the online audio market. Thank you, everyone. With that, I will now turn the call over to our acting CFO, Ms. Chengfang Lu, who will discuss our financial results in more detail.

Thank you, Marco, and hello, everyone. We are pleased that our third quarter financial results were in line with our expectations and our endeavor to increase operating leverage brought about a set of improvements in profitability during the quarter. In the third quarter, our total net revenues increased by 10% to RMB361.5 million throughout the same period of 2019, mainly contributed by the growth in our paying user base. Our average number of monthly paying user increased by 17% year-over-year to 448,300 in the third quarter, driven by our content offering strategy and around unremitting efforts in driving user traction and engagement. Currently, we generate our revenue primarily from our audio entertainment business, which contributed RMB355.8 million to net revenues in the third quarter of 2020, representing a year-over-year growth of 9%. The increase was mainly due to our increasingly expanding user base and increasing the number of paying users for our interactive audio social entertainment product during the period. Additionally, podcast, advertising and other revenue grew by 61% year-over-year to RMB5.7 million in the third quarter of 2020. The increase was mainly due to an increase in the number of paying users in our podcast services and advertisers. Cost of revenue increased by 2%, both year-over-year and quarter-over-quarter, to RMB270.9 million. The year-over-year increase was mainly due to the increase of salary and welfare benefits, payment handling costs and bandwidth cost, which were generally in line with the growth of the company's business as well as the recognition of share-based compensation expenses that became effective upon and after our IPO, partially offset by a 1% decrease in the revenue sharing fees because of the incentive program for content creators we launched in the third quarter of 2019 has been scaled down since February 2020. The quarter-over-quarter increase was mainly due to the increase of revenue sharing fees to our content creators, which was in line with growth of the revenues, partially offset by the decrease of share-based compensation expenses in this quarter. Our gross profit was RMB90.6 million in the second quarter -- third quarter of 2020, representing an increase of 41% year-over-year and increase of 6% quarter-over-quarter. Our non-GAAP gross profit was RMB91.9 million in the third quarter of 2020, representing an increase of 43% year-over-year and an increase of 1% quarter-over-quarter. Our gross margin increased by 100 basis points from the second quarter of 2020, reaching 25% in this quarter. Our non-GAAP gross margin was 25% in the third quarter of 2020 compared to 26% in the second quarter of 2020. Operating expenses decreased by 13% year-over-year and 10% quarter-over-quarter to RMB100.2 million in the third quarter of 2020. Research and development expenses, a key component of operating expenses, was RMB55.6 million in the third quarter of 2020, representing a year-over-year increase of 28%. The increase was mainly due to our increasing number of research and development employees as well as the share-based compensation expenses recognized upon and after our IPO. Selling and marketing expenses were RMB27.1 million in the third quarter of 2020, decreased by 53% from RMB58.3 million in the third quarter of 2019. The decrease was mainly due to the reduced expenses related to branding and promotional activities in the third quarter of 2020. General and administrative expenses were RMB17.4 million in the third quarter of 2020 compared to RMB13.8 million in the third quarter of 2019. The increase was mainly due to the increasing expenses in salary and welfare benefits, professional services and recognition of share-based compensation expenses upon and after our IPO. Our operating loss was RMB9.6 million in the third quarter of 2020, narrowed down by 82% year-over-year and 62% quarter-over-quarter. Non-GAAP operating loss was RMB2.9 million in the third quarter of 2020, narrowed down by 94% year-over-year and 74% quarter-over-quarter. Net loss was RMB6.1 million in the third quarter of 2020, narrowed down by 87% year-over-year and 72% quarter-over-quarter. Non-GAAP net income was RMB0.6 million compared to non-GAAP net loss of RMB48.5 million in the third quarter of 2019 and non-GAAP net loss of RMB8.2 million in the second quarter of 2020, respectively. Basic and diluted net loss per ADS were RMB0.13 in the third quarter of 2020 compared to RMB39.20 in the third quarter of 2019 and RMB0.48 in the second quarter of 2020, respectively. Non-GAAP basic and diluted net income per ADS were RMB0.01 compared to non-GAAP basic and diluted net loss per ADS of RMB3.73 and RMB0.18 in the third quarter of 2019 and second quarter of 2020, respectively. The difference between GAAP and non-GAAP EPS is mainly due to adjustments to the accretion of preferred share reduction values and share-based compensation. As of September 30, 2020, we had cash and cash equivalents, restricted cash as well as short-term investment of RMB350.6 million. Overall, we achieved meaningful progress in the third quarter of 2020. We continue to be optimistic about the future of the online audio industry in China and across the globe. In the near future, we will continue to carry out our user growth strategy and remain dedicated to enhancing our content ecosystem, strengthening brand awareness, expanding technology capabilities and advancing our strategic initiatives to build out our platform for sustainable growth. With that in mind, for the fourth quarter of 2020, we currently expect total net revenues to be in the range of RMB370 million to RMB400 million. This forecast reflects our current market conditions, including those related to the COVID-19 pandemic and reflect the company's preliminary estimates of market and operating conditions and customer demand, which are all subject to changes. Now this concludes all of our prepared remarks today, and we will now open the call to questions. Operator, please go ahead.

[Operator Instructions]. Our first question comes from the line of Vincent Yu of Needham & Company.

I actually have a few questions. My first question is, can you guys comment on the total time spent by user on the platform as the summer break was shortened during this third quarter? The second question is, can you comment on the paying behaviors, our highest-paying user cohort? Have you seen a significant rebound after COVID-19 subsided? Third question is, do we have any updates regarding the celebrity live streaming initiative and advertisement initiative? My fourth question is about the data regarding -- around podcast and live streaming dual subscription program.

Okay. Marco will take the first 3 questions, and I will translate for him. For the first question, it's about the time spent by users on the platform. So with the shorter summer break, we still maintained the average daily usage time of 52 minutes, which is thanks to our efforts on meeting diversified demand from users. So in this quarter, we launched a series of themed events; and further enriched and highlighted our premium content, the massive high-quality content pool and diversified interactive features; further improved our platform's appeal to users; ensured the usage time and enhanced the vitality of our community. Okay. For the second question, it's about the highest-paying user cohort and the rebound after the COVID-19 subsided. So first of all, the audio live streaming is quite different from the video live streaming. So online audio is much more a mass market. The concentration of paying user is relatively lower, with limited revenue concentration among the top users. So overall, we saw users have better balance of online and off-line consumption while the resumption of work and school. And online consumption is recovering. We saw a rebound in average ordinary user spending compared to last quarter, which is not due to the highest-paying user cohort. So in terms of celebrity live streaming, we provided a platform for celebrities to interact with fans and a channel for fans to meet and interact with celebrities more closely. Many popular celebrities are willing to interact and communicate with fans through our online audio entertainment features. So in the meantime, we are dedicated to meeting users' needs of interaction with celebrities through different programs and in reaching the live streaming content through various means. So Marco take the example of we invited Zhang Zining, a former member of Rocket Girls 101, which you might have heard about, a highly popular girl group, to our platform for audio live streaming and actively interacted with her fans. The exposure accounted for more than 2 million times. In addition, we also collaborated with a number of popular TV shows to host creative events. The audio live shows, we cooperated with SNH48, a popular girl group; and Yang Yingge, a performer in the show of The Coming One: Super Band, with a lot of attention and discussions among fans with more than 1 million times exposure across the Internet and 600,000 times cumulative plays. In terms of the advertising, we believe that advertising for audio live streaming is quite high potential. So we currently mainly focus on optimizing the advertising management platform at the current stage, which is expected to have more positive impact in the future.

And Marco, can I ask one more question?

Yes.

Sorry, Marco, can I ask just one more question? So like you mentioned that we are developing that on the audio of cars. So I'm wondering, are we going to work with auto manufacturers or the software platforms, which are -- to install on these auto manufacturers? And also, it feels like for this audio, which will be used on cars while driving, will heavily rely on, like, recommendation and also voice control. Do we -- are we planning to more do sales developments? Or are we going to work with some algorithm or provider? Or like, will there be any impact on R&D?

Okay. Thank you. So we think the entire audio market is a high-potential market, especially for the new energy vehicle producers. And for the use of audio application, it's more about the focus we will concentrate on, especially in the product side and also the algorithm. We are going to improve both of the product, also the algorithm combined with our AI technology. Firstly, we will improve the user experiences for the in-car audio product. And you are right that other products might not be applicable in the -- to use in the in-car audio system. Another side is for the AI recommendation. AI recommendation is very important for the in-car audio market. And we do have years of experiences in the technology, and also, we have leading technology capabilities which we can use to deploy into the in-car audio market. As for now, our focus is more on the AI technology and also the improvement of the user experiences. Thank you.

We have a question from Vicky Wei of Citi.

Congratulations for the profitability for this quarter. I have two questions. The first one is about the fourth quarter initiative. So we saw the guidance was up on a quarterly basis. May I ask, is there any major marketing event or activity during the quarter? And if so, will there be any implication for the expense line? And my second question is about the implication on the recent regulation about the limitation of -- on the user tipping, including large donor and minor donor? What does it imply for the Lizhi paying user?

Thank you for your questions, and let me share some information about our major investments in the second half of this year. Actually, as Marco mentioned about, this quarter, we were more focused on platform development and improving operating efficiency. And in the fourth quarter, we will host regular operating events, and by end of the year, we plan to hold an annual voice ceremony and -- which we believe would stimulate revenue as well. And in addition, we are incorporating new audio podcast products and plan to fully enter into the in-car audio market, enabling more users to listen to high-quality products. And we believe this will help content creators gain more attention and expand their user base as well. Meanwhile, we will also adjust our promotion and incentive policies based on the actual situation, and we expect our revenue sharing policy remains stable generally in the fourth quarter. Thank you. And I will turn to Marco for the second question. So at present, some of the regulations is more about the live streaming platforms and the user behaviors on the live streaming platforms. It actually takes a long time for those regulatory departments to process the regulations as many -- like, according to different aspects in the market, which I believe is reasonable for the industry. As for Lizhi, we actually have been committed to implementing the regulatory policies and apply strict control on user behavior identification functions on the platform. As for the underage users, Lizhi has developed and launched the underage mode in last December to protect their rights and interests from the perspective of product functions, which has reduced the risk brought by the underage virtual gifting behavior. We have also been actively cooperating with relevant departments to meet the network security standard. For example, in September, we launched the audiobook network literacy for teenagers on our platform and actively spread knowledge of network security. So in general, the concentration of paying users on Lizhi is relatively low. The audio entertainment sector, which is based on voice interaction, focuses more on the emotional connection between user and the host as voice is more about the companionship. The main driver for paying activities is the strong bond between the user and content creators as well as their relationship. So impulsive virtual gifting behaviors are very rare on our platform. In general, we don't think the regulation will have much impact on our current business development. We will continue to actively implement relevant regulatory requirements and intend to set up the online audio branches who cooperate with key units and relevant agencies in the online audio field to promote the standardization of the industry and self-regulation of the industry players and to meet the requirements of other related departments. Thank you.

Your next question is from Billy Leung of Haitong.

I have two questions. The first question is, can management share color or some details of our latest cooperation with the Guangdong government? Any implications on revenue or investments going forward? And my second question is on 2021 outlook. Can management share any expectations or guidance in terms of maybe revenues or users?

So the first question is about the pilot online audiovisual program Lizhi has been selected into. So we think Lizhi was selected as one of the pilot online audiovisual companies in Guangdong province is actually a great recognition from the regulatory authorities over the company's top position in the industry and also a demonstration, in fact, of Lizhi's practices. So this will actually play a guiding role for us and for our future development of content categorization and AI technology development and also the big data analytics. It will also increase our industry impact and enable us to receive more support in the technology development and innovation. So in general, our next step will more focus on the enhancement of our platform construction and focus on the unique UGC feature, and support our content creators drive the long-term growth through AI technology and explore the diversified business models, including committing ourselves to expanding the audio application scenarios and also bringing users the real interactive audio entertainment experiences. Okay. So for next year's forecast, we think it's still too early to say anything about that. So we need more time to -- for our future development. So currently, we will not discuss the detailed forecast for next year. Thank you.

Your next question is from Ivy Liu of Credit Suisse.

What's management's view on current audio live streaming or audio entertainment competition landscape on the audio live streaming sector? And do you guys -- if you guys have any plan on overseas expansion.

So compared with other platforms in terms of the competition, Lizhi has always been targeting the audio market with a strong focus on diversifying the content and committed to developing the unique UGC business model. With years of development and efforts, we've developed a massive content pool and built a strong community atmosphere and being committed to providing a highly engaged and interactive community while creating more possibilities for audio through our leading technologies. So in terms of commercialization, we've actually established an effective reward mechanism for our content creators and further enhanced the content creation and improved our content quality. We will continue to meet users' diversified demand for audio and help them express themselves and then receive the companionship with other voices. Through a variety of focus area like content creation, community and audio interaction features, we are also dedicated to help content creators present themselves, gain recognition and achieve considerable income through voices. We believe the audio industry is actually a blue ocean market, and we believe Lizhi has differentiated and competitive advantages in the market. In addition, I personally think the audio market is just beginning to develop, and the application scenarios of audio are diverse. With the increasing popularity of intelligent vehicles and like smart home devices, the growth potential for the online audio industry is sizable. As mentioned earlier, we are exploring the in-car audio market, and we believe the development of audio devices can actually further enhance our competitive advantages. So in terms of the overseas expansion, we think the overseas market is actually huge. And users have a strong demand for audio products. We are preparing and developing some of the products in the overseas expansion. And when we have more efforts and when we have more results, we will disclose to the market. Thank you.

As there are no further questions, now I'd like to turn the call back over to the company for the closing remarks.

Thank you once again for joining us today. But if you have further questions, please feel free to contact Lizhi's Investor Relations through the contact information provided on our website at ir.lizhi.fm or the TPG Investor Relations group. Thank you.

Thank you. Thank you, everyone.

Thank you. Ladies and gentlemen, this concludes the conference call. You may now disconnect your lines. Thank you.