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Lizhi Inc (NASDAQ:LIZI)
Q1 2020 Earnings Call
May 21, 2020, 8:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen, thank you for standing by, and welcome to the Lizhi INC. First Quarter 2020 earnings conference call. [Operator Instructions] Today's conference call is being recorded.

I'll now turn the call over to your host, Investor Relations of the company. Please go ahead.

Unidentified Participant

Thank you very much. Hello, everyone, and welcome to Lizhi's first quarter 2020 earnings conference call. The Company's financial and operating results were released via Newswire services earlier today and are available online. Participants on today's call will include our Founder and CEO, Mr. Marco Lai; Co-Founder and CTO Mr. NING DING; and our CFO, Ms. Catherine Chen.

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 a 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 provision of the U.S. Private Securities 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 risk and uncertainty. 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 the Company's control.

The company, its affiliate, advisors, 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 includes discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. Lizhi's press release contains a reconciliation of the unaudited non-GAAP measures to the unaudited GAAP measures.

I will now turn the call over to our Founder and CEO, Mr. Marco Lai. Please go ahead.

Jinnan (Marco) Lai -- Founder, Chief Executive Officer and Director

Thank you. [Foreign Speech] Hello, everyone, and thank you for joining us on our call today. The first quarter of 2020 represents a remarkable start for Lizhi as we're successfully listed on NASDAQ, allowing us to gain even broader recognition as the go-to online audio platform in China. We are proud to deliver strong first quarter results, reaching new records in our key operating and financial metrics.

[Foreign Speech] For the first quarter, our average mobile MAUs grew by 34% year-over-year, reaching 54.5 million, a new high. Our content creator base also reached a record high with average monthly active hosts of approximately 6.2 million in the first quarter of 2020. With our enhanced commercialization model, our average monthly paying user base has increased by 60% year-over-year. Our revenue also reached an all-time high of RMB370 million, surpassing the top end of our management guidance.

Also of note, we have achieved a meaningful improvement in gross margins. This metrics, individually and combined, demonstrates our strong execution and healthy business model.

[Foreign Speech] We attribute our success to our dynamic UGC audio content ecosystem along with our highly engaged and interactive communities.

We are thrilled to see our platform increasingly favored by young generation and to continue increasing the vitality of our UGC community as we remain dedicated to content enrichment, product innovation and technology empowerment.

Our robust growth momentum in the first quarter reaffirms the demand for digital audio experiences and audio social interactions. As we strive to continue meeting this demand, we believe we are well positioned to capture broad opportunities in the online audio market.

[Foreign Speech] with that as a foundational overview, I would like to go through some of the key initiatives and trends we are seeing in our core businesses and how they fit into our longer-term strategy.

[Foreign Speech] First, I would like to begin with our content ecosystem. As leading UGC audio platform in China, Lizhi has cultivated one of the most attractive and welcoming environment for audio content creators. We are dedicated to enhancing the simplicity of the audio content creation process through a suite of simple yet intuitive audio recording and editing tools proprietarily developed by our in-house team.

With only a mobile phone, content creators can easily create, edit and upload audio content; operate their own live streaming channels; activity interact with audiences and gain access to a broad fan based. And currently Lizhi is becoming many people's first choice when it comes to audio content creation, consumption and social interaction. At the end of the first quarter, the cumulative number of podcasts uploaded to our platform reached a new record high of 196 million, up 52% year-over-year.

[Foreign Speech] We focus heavily on increasing the vitality of our UGC ecosystem and have rolled out features such as Radio logs or Rlogs, a new version of Voice ID Card, helping us engaged larger numbers of the new users in the audio content creation and sharing. Many people use Lizhi to record their daily life, pass their voice feature, and share with their friends. In February, we hold Online Lizhi Voice Gala in recognition of all of our content creator's efforts. An audience of more than 6 million joined the events to support the award winning audio content creators.

With a large and growing audio content creator base and effective operational campaigns, we are gaining more diverse and creative audio content submission, which is enhancing our mass market appeal and driving organic user growth.

[Foreign Speech] For the first quarter, our most heavily traffic verticals where life and relationships, entertainment and education. For life and relationship we promoted Rlog and the Lizhi companionship plan as during the lockdown period people were keen on staying connected by ways of recording their lives, expressing themselves, supporting their friends and families, finding companionship to get emotional and a psychological relief.

[Foreign Speech] For entertainment, to tackle the challenges due to restricted offline performance during the period of curtailed public movements, we brought online over 300 crosstalk performance nationwide and promoted a series of Chinese crosstalk audio live streaming shows. These high quality crosstalk live shows, including shows performed by [Indecipherable] crosstalk club have engaged around 1 million audience members. During the first quarter, we've also engaged more than 60 artists, actors and entertainers such as [Indecipherable] to host the audio based live streaming events or record Rlogs to share their life.

[Foreign Speech] For education, we have promoted a read-aloud together [Phonetic] campaign in cooperation with Chinese literature magazine and on reading test book at home started program. Besides we jointly launched the parenting melodrama on our platform in partnership with Chinese animation GG Bond. All of this attracted numerous users to participate. In addition, many users used podcast audio based live streaming and chat rooms on Lizhi platform for classes and learning together online.

[Foreign Speech] With the advantage of integrated podcast in our live streaming content ecosystem, we are able to offer more granular and interactive choices and experiences to satisfy varying user demand.

[Foreign Speech] In terms of the expansion of our community, we remain focused on fostering user engagements and interaction among users and hosts by broadening social interactive features and products. We are excited to see in the first quarter, the average daily time spent on our mobile app grew to 55 minutes, a substantial increase from 47 minutes in the year ago period and 53 minutes in the fourth quarter of 2019.

With the increasing popularity of our audio social interactive features such as Friends Hall, matchmaking and Lizhi Party online karaoke, overall the user interaction from our platform also reached a record high. Our users and content creators together generated over 2.9 billion monthly average interactions through chat, comments, likes, and on-air dialogs.

[Foreign Speech] We have integrated our fan based membership programs across podcast and live streaming in the first quarter to enhance content creator's connections with their fans, providing more services and better experiences to our users.

[Foreign Speech] Turning to our commercialization, entering into 2020, we continued to enhance our leadership position as an exciting and growing UGC platform that provides a wide range of audio content and audio social entertainment experiences capable of strong underlying commercialization. The community-driven phenomenon on our platform positions Lizhi to consistently strengthen the bonds between content creators and the users, and we are exploring new opportunities.

In the first quarter our audio entertainment revenue continues to deliver robust growth. Meanwhile, we are making positive progress across our new commercialization initiatives such as our fan based membership program, paid content advertising and games.

[Foreign Speech] Looking at the rest of the year, our top priorities continues to be focused on the expansion of compelling UGC ecosystem, the cultivation of our highly interactive community and the further enhancement of our powerful AI technology, all of which are the key drivers to successfully achieve new user growth while retaining our existing user base.

[Foreign Speech] The upcoming IoT era will dramatically transform the way people enjoy online audio and represents a wide range of new user scenarios dominated by audio interactions. To capitalize on these upcoming new growth wave, we are investing in our online audio applications to capture enormous opportunities in the new IoT era.

In September 2019, we started a strategic partnership with Baidu to co-develop the interactive audio applications for IoT ecosystem. In the first quarter of 2020 we launched the Lizhi own Xiaodu smart speakers, including our most popular interactive audio function, namely live streaming, on-air dialogue and buddy [Phonetic] chatting. We are committed to our IoT strategy, which we believe will unlock the significant growth potential in the long run.

[Foreign Speech] In summary, notwithstanding the coronavirus outbreak which caused a certain impact on our business operations in the first quarter, we are excited to get the year off to a solid start. We continue to see enormous opportunities for future growth and we are confident in our commercialization models and strong competitive position, bolstered by our clear strategies, strong execution track record and technology-driven innovation capabilities.

Now, I would like to pass the call over to our CTO, Mr. Ning Ding to provide more business updates.

Ning Ding -- Co-founder, Chief Technology Officer and Director

[Foreign Speech] Thank you Marco, and hello everyone. I'm Ning Ding and I'm glad to join today's call.

[Foreign Speech] We're extremely encouraged with our momentum entering 2020, as we started this year with another strong quarter and delivers robust operational results, we will continue to strengthen our strategic efforts and further optimize operations to expand our user base and improve overall user engagement.

[Foreign Speech] Leveraging our audio-centric technology capabilities, we are able to complement our massive content library with a wide spectrum of interactive features. In addition, AI driven content distribution and recommendation help deliver superior experiences for both content consumers and creator. We have the interactive entertainment products and programs experiencing accelerating growth in the user base and activities, underscoring the significance of this particular strategic focus.

[Foreign Speech] AI technology has been increasingly playing a vital role in driving our business growth. We applied AI not only in the content distribution, but also to content creation along with cutting-edge data analytics and insights into user behaviors and preferences. This allows us to improve user stickiness and loyalty to our community. Content creators also benefit from the implementation of AI technology as they increases the effectiveness and efficiency of their creation and distribution process, as having a better understanding of their audience to enhance the commercialization.

[Foreign Speech] Looking ahead, we are excited about more innovative opportunities that can come from our diversified commercialization model. We will continue to advance our technological capabilities to provide more personalized and interactive entertainment services, improve AI technology applications in various effects of our operation. And further strengthen our well-established leading position in the UGC audio market.

With that I will now turn the call over to our CFO, Ms. Catherine Chen, who will discuss our financial results in more detail.

Xi (Catherine) Chen -- Chief Financial Officer and Director

Thank you, and hello everyone. We are excited about the solid start of 2020 despite the impact of coronavirus outbreak. In the first quarter, our net -- total net revenues surpassed RMB370 million, up 42% year-over-year and exceeding the top end of our previous guidance. Our average number of monthly paying users increased by 60% year-over-year, reaching 450.3 thousand in the first quarter. Mainly attributable to our experience and the ability to monetize our fast growing user traffic through our diverse socially interactive products. Currently we generate our revenue primarily from audio entertainment business, which contributed RMB366.4 million in net revenue in the first quarter of 2020, presenting YOY growth of 41%. We continue to drive more and more online traffic to our audio entertainment segments. So further integration of our podcast and live streaming ecosystem. This has contributed to the growth of our paying user base and monetization.

Podcast, advertising and other revenues grew by 172% year-over-year to RMB3.8 million in the first quarter 2020. We are pleased with this enhanced monetization diversification followed by increasing user spending on our podcast content services. Cost of revenue increased by 62% year-over-year to RMB297.4 million and slightly decreased by 1% quarter-over-quarter. This was primarily due to the increase of revenue sharing fee and bandwidth costs compare a year ago, which was generally in line with the growth of our business as well as the recognition of share-based compensation expenses that became effective upon the IPO. The quarter-over-quarter decrease was due to the wind down of the short-term incentive program, which was launched in the third quarter of 2019 to encourage content creation and attract more content creators and users to our new podcast and interactive audio features.

Gross profit was RMB72.9 million in the first quarter 2020, representing a decrease of 6% year-over-year and increase of 13% quarter-over-quarter. Non-GAAP gross profit was RMB78 million in the first quarter of 2020, representing an increase of 1% year-over-year, an increase of 21% quarter-over-quarter. Gross margin increased by 200 basis point from fourth quarter 2019 reaching 20% in the first quarter. Non-GAAP gross margin increased by 300 basis point from first quarter of 2019 reaching 21% in 1Q 2020. Operating expenses increased by 37% year-over-year to RMB120.6 million in the first quarter of 2020.

Research and development expense, a key component of our operating expenses was RMB58.4 million in 1Q 2020, representing year-over-year increase of 101%. The increase was mainly due to our efforts in the development of our AI application and enhanced data security as well as the share-based compensation expenses recognized upon after our IPO. Selling and marketing expenses were RMB35.7 million in the first quarter of 2020, decreased by 31% from RMB51.9 million in 1Q 2019. The year-over-year decrease was primarily attributable to a decrease in expenses relating to branding and promoting activities in 1Q of 2020.

General and administrative expenses were RMB26.4 million in 1Q 2020 compared to RMB7.2 million in 1Q 2019 and RMB15.1 million in 4Q 2019. This increase was primarily due to the recognition of share-based compensation expenses as mentioned. Operating loss was RMB47.7 million in the first quarter of 2020 compared to RMB31.7 million in fourth quarter of 2019 respectively. Non-GAAP operating loss was RMB28.7 million in 1Q 2020, a decrease of 10% from RMB31.7 million in fourth quarter of 2019.

Net loss was RMB48.2 million in the first quarter 2020 compared to RMB29 million in the fourth quarter of 2019, mainly due to the share-based compensation expenses, which was granted during the past two years that became effective upon IPO. The non-GAAP net loss was RMB29.2 million compared to RMB29 million in the first and the fourth quarter of 2019. Basic and the net loss per share were RMB0.27 in the first quarter of 2020 compared to RMB0.56 and RMB1.16 in the first and the fourth quarter out 2019 respectively. Non-GAAP basic and diluted net loss per share were RMB0.04 compared to non-GAAP basic and diluted net loss per share of RMB0.04 and RMB0.11 in the first and the fourth quarter of 2019, respectively. The difference between GAAP and non-GAAP EPS is mainly due to adjustments to the accretion of preferred share redemption value and share-based compensation.

As of March 31, 2020, the company had cash and cash equivalents as well as short-term investments of RMB326.9 million compared to RMB82.7 million as of December 31, 2019. The increase is mainly due to our IPO financing.

Overall despite the impact of COVID-19 we achieved and strong growth in the first quarter of 2020. We continue to be optimistic about the future of the broader online audio industry and are confident in overall ecosystem and product pipeline we are building. We plan to further develop our commercialization, leveraging our growing traffic and increasing user participation in our audio entertainment segment. We also see benefits in further expanding our diverse revenue stream and continuing to improve our paying ratio. Longer term, we believe our monetization efforts, increase in paying user base and operational efficiency will yield further top line growth as well as bottom line improvement.

With that in mind, for the second quarter of 2020 we currently expect total net revenues to be in the range of RMB350 million to RMB380 million, translating into accelerated year-over-year growth rate in the range of 56% to 69%. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change.

This concludes all of our prepared remarks today. We will now open the call to questions. Operator, please go ahead.

Questions and Answers:

Operator

Thank you. So the benefit of all participants on today's call, if you wish to ask your question to management in Chinese please immediately repeat your question in English. For the sake of clarity, in order, please ask one question at a time. Management will respond. And then, feel free to follow-up in your next question. [Operator Instructions] Our first telephone question today is from Vicky Wei from Citi. Please ask your question Vicky.

Vicky Wei -- Citi -- Analyst

[Foreign Speech] Good morning management. Thanks for taking my questions. I have questions about user retention and competitive landscape, would management please share some color about the user chain and retention rate post the COVID-19? And my second question is about competitive landscape, so will management please also share latest competition landscape and it is position? Thank you.

Ning Ding -- Co-founder, Chief Technology Officer and Director

[Foreign Speech] Hey, in the first quarter of 2020, our MAUs reached 54.5 million, up 34% year-over-year. In the next month, retention rates of new users reached 44% and the overall next month user's retention rates reached 66%. So not only in the first quarter our user vitality and stickiness were both further improved. As mentioned before, the user time spent has been improved and the monthly average user interactions also have been improved a lot.

[Foreign Speech] During the coronavirus outbreaks that we see that both our user time spend and interactions has been increased substantially. And although like, now many people returned to work, but we still see that people are gaining the user habit of using online audio as a way for education and entertainment and we don't see like this users, and we see this users will remain sticky to the platform after the coronavirus outbreak.

[Foreign Speech] So in terms of competition landscape there we're seeing that Lizhi music are also entering into the long-form audio space. This kind of players with a massive user base, when you come into the market, which is also bringing more attention and more user education to the overall industry.

[Foreign Speech] So, we have these new entrants coming into the long from audio sector mainly through acquisition of IP, which form competition to some of the existing online audio players given that Lizhi is the larger UGC audio community platform in China and we have a very solid ecosystem, so we don't see marked competition coming from the PKC [Phonetic] players that are newly entering into the market.

[Foreign Speech] In the long run, Lizhi focus a lot on nurturing our own UGC ecosystem. And with this robust ecosystem, we are seeing a strong entry of barriers. And we believe this will bring in us with long-term growth.

Vicky Wei -- Citi -- Analyst

[Foreign Speech] Thank you.

Xi (Catherine) Chen -- Chief Financial Officer and Director

Thank you.

Operator

[Operator Instructions] Our next telephone question is from Vincent Yu from Needham & Company. Please ask your question, Vincent.

Vincent Yu -- Needham & Company -- Analyst

[Foreign Speech] Hi, management. Thanks for taking my question. My first question is about, what are some of the strategic initiatives we are going to take regard to increase the paying ratio for the podcast listeners. My second question is, as students are returning to schools and are taking classes in weekends, can you share what percentage of -- is the students among our user pool. My third question is, can you guys share any information on how our -- Xiaodu is performing, any preliminary user adopt rate. Thanks.

Jinnan (Marco) Lai -- Founder, Chief Executive Officer and Director

[Foreign Speech]

Xi (Catherine) Chen -- Chief Financial Officer and Director

In terms of the commercialization, which was mainly driven by our user -- social and user interaction lead to -- dedicated to enriching our live streaming content ecosystem, integrating diverse content categories as well as exploring various audio experience scenario, so as to boost interactions between our users and hosts. For example, we have launched a fan base membership program and paid contents to combine our live streaming and podcast ecosystem, boosting our user willingness to pay. Meanwhile, we have launched with social interactive features in order to derive more connections between podcasters as well as our large massive users.

All in these ways, we also try -- we also have strengthened application of AI technologies to better understand our users and better understand our contents and hosts, in order to improve the paying user conversion in our podcast segment as well as well as in general increase our overall platform paying ratio.

Jinnan (Marco) Lai -- Founder, Chief Executive Officer and Director

[Foreign Speech] So regarding our collaboration with Baidu that we have been connected -- we have launched the later on Xiaodu smart speakers already and have already inserted other interactive features. And the interaction on the smart speaker is quite different from the way on the -- that tax on the mobile end. As people are using different user behavior. Given that we have been [Indecipherable] we are still in the testing and exploration period as this product has been launched not long ago. So we will share our detailed data as and when it becomes into a bigger scale.

And in terms of the collaboration with Xiaodu smart speakers. We are also collaborating with by Baidu on exploring new products regarding audio interactions, which will introduce in some of the new ways people interact with the smart speakers and that we'll expect to come and launch in the second quarter.

Vincent Yu -- Needham & Company -- Analyst

Thank you. [Foreign Speech]

Operator

Next telephone question is from Bo Pei from Oppenheimer. Please ask your question Bo Pei.

Bo Pei -- Oppenheimer -- Analyst

[Foreign Speech] And now I will translate myself, my first question is about paying user behavior during COVID-19 outbreak. So do we observe any change during the outbreak about the paying behavior and then since the outbreak slowdown the macro economy quite significantly derisked, is there any slower spending on [Indecipherable].

And then my second question is about our investments into AI. In our prepared remarks, we also mentioned this is going to improve our efficiency. So just wondering if you can show any same examples about how -- what areas we are investing and how does this to improve our monetization efficiency in the future? Thanks.

Jinnan (Marco) Lai -- Founder, Chief Executive Officer and Director

[Foreign Speech] As we can see from the first quarter performance, our MPU has increased under strong momentum, which we see that there is certain impact from the coronavirus. But given that our users are in the [Indecipherable] paying on our platform that we see this trend will be sustained after the coronavirus outbreak.

[Foreign Speech] So in terms of AI investment, AI investment well actually penetrated to all related business including our content creation, content distribution and content monitoring as well as monetization. So basically our -- we have been improving the content recommendation. For example, our completion of listening rate has reached around 35% that was contributed by the improved efficiency automated by AI technology that people are able to find contents they like and can complete a substantial part of the Listening of the related programs and we'll continue to invest in the AI in order to improve the efficiency of the overall platform.

Bo Pei -- Oppenheimer -- Analyst

Thank you. [Foreign Speech]

Operator

[Operator Instructions] As there are no further questions now, I'd like to turn the call back to the company for closing remarks. Please go ahead.

Xi (Catherine) Chen -- Chief Financial Officer and Director

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

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Jinnan (Marco) Lai -- Founder, Chief Executive Officer and Director

Ning Ding -- Co-founder, Chief Technology Officer and Director

Xi (Catherine) Chen -- Chief Financial Officer and Director

Unidentified Participant

Vicky Wei -- Citi -- Analyst

Vincent Yu -- Needham & Company -- Analyst

Bo Pei -- Oppenheimer -- Analyst

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