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DouYu International Holdings Ltd (NASDAQ:DOYU)
Q1 2020 Earnings Call
May 26, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and good evening, ladies and gentlemen. Thank you, and welcome to DouYu International Holdings Limited first-quarter 2020 earnings conference call. [Operator instructions] Please note, this event is being recorded. I will now turn the call over to the first speaker today, Ms.

Mao Mao, investor relations of DouYu. Please go ahead, ma'am.

Mao Mao -- Investor Relations

Thank you, operator. Hello, everyone. Welcome to our first-quarter 2020 earnings conference call. Joining us today are Mr.

Shaojie Chen, chairman and CEO; Mr. Mingming Su, chief strategy officer; and Mr. Hao Cao, vice president of finance. You can refer to our first quarter of 2020 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 provisions 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 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. Now I will speak on behalf of our chairman and CEO, Mr. Shaojie Chen. We concluded the first quarter of 2020 with solid financial and operational results.

During the period, total net revenue increased by 53% year over year to RMB 2.28 billion. Gross profit increased by 139.2% year over year to RMB 485.9 million, while gross margin expanded to 21.3%. Meanwhile, net income was RMB 254.5 million, representing a net margin of 11.2%. Our adjusted net income grew to RMB 296.9 million, representing an adjusted net margin of 13%.

Additionally, quarterly paying users increased by 26.2% year over year to 7.6 million. In the first quarter, our mobile user base maintained a rapid growth trajectory with our average mobile MAUs increasing by 15.3% year over year to 56.6 million. Although the first quarter is a traditional slow season for us and the coronavirus outbreak caused a certain amount of uncertainty in the marketplace, we were able to continue growing our mobile MAU through effective measures. During the period, for example, we broadcasted more new top-tier games, developed more premium eSports content, enhanced our collaboration with game developers and attracted more high-quality streamers with growth potential.

We also implemented more productive streamer guidelines, which helped to augment total live streaming hours. These positive trends were offset by the temporary closure of Internet cafes due to pandemic, which caused our PC MAUs to decrease in the fourth quarter, while the combination of these factors led to a slight decline in our average total MAUs, which were 158.1 million in the first quarter, compared to 159.2 million in the same period of 2019. Coming to the second quarter, we have been able to maintain our growth momentum in mobile MAUs as we continue to refine our platform operation. Going forward, the mobile market will continue to be a strategic focus for user growth as we believe that it still has a tremendous growth potential.

We plan to keep enhancing our eSports live streaming capabilities, upgrading our community-based content operations and expanding our content offering beyond live streaming so that we can further deepen our penetration of the mobile market and sustain the rapid growth of mobile users. Underneath our user base expansion lies the solid foundation of our comprehensive content ecosystem. Through the quarter, we continued to invest in high-quality eSports-centric content. At the same time, we also refined our operation to device new content and maximize content value.

As a result, we are able to maintain high level of user engagement and user stickiness on our platform with our user -- with our game live streaming segment accounting for about 8% of our total viewership during the quarter. Beyond internal content operations, our further exploration of value creation opportunities up and down the eSports value chain also yielded promising results. During the quarter, top eSports teams continued to play a very important role in our content ecosystem. For example, League Of Legends, JDG and eSports team that was the bouncer while in the LPL spring 2020.

We also built up Honor of Kings DYG, who ranked second in the Western division of the KPL Spring 2020. This top eSports team delivered outstanding performance and helped to contribute additional premium eSports content to our platform in the quarter. We also continued to deepen our collaboration with game developers and publishers, especially in terms of online eSports tournament and our related partnerships. During the quarter, we broadcasted over 50 large scale eSports tournaments, including LPL Spring 2020 and KPL Spring 2020.

At the same time, we also produced over 40 eSports tournaments through either in-house production or through development with external partners. Notably, we collaborated closely with Honor of Kings called, Jack King, and through strong participation from both streamers and users, we were able to significantly boost our user participation rate, streamer engagement levels, as well as streamer user interaction. This effort has helped us create additional value along the eSports value chain, which enjoys our eSports community and will also contribute to our exploration of potential eSports business model in the future. To further solidify our content ecosystem, we continued to utilize our dual streamer management model of combined direct management of top streamers and joint management of mid-tier, long-tail streamers with talent agencies, especially on the live streaming of new game titles front.

We are able to quickly stimulate high-quality content system by leveraging our own business know-how and employing a combination of channeling high-quality streamers to the new game segment and recruiting new game -- new streamers through the partnerships with the talent agencies. As a result, we are able to augment our industry leadership in the live streaming of new games. Building [ Technical difficulty ] our extensive user base and leading content ecosystem, we mobilized the three key drivers to accelerate our revenue growth in the quarter: First, we continue to refine and upgrade our interactive feature to stimulate user stream engagement, cultivate user paying habits and increased total tipping revenue; second, we deepened our collaboration with talent agencies to increase our monetization efficiency and solidify our supply of high-quality streamers, who have favorable monetization characteristics and help to attract a broader range of users; third, we further developed our transaction-driven event system through which we are building a methodical, consistent user monetization process. As a result, our quarterly paying users increased by 26.2% year over year to 7.6 million, implying a paying ratio of 4.8%, compared to 3.8% in the prior-year period.

Also, ARPPU increased by 23.7% year over year to RMB 280 in the first quarter. In addition, as we refine our operating tactics tailored for each content segment, both our monetization rates and mid-tier streamers income improved noticeably. Going forward, we plan to explore new user features and functionalities and device innovative marketing initiatives to bolster the overall operating efficiency of our platform. We will also deepen our collaboration with both streamers and talent agencies, enhance our operations and improve our monetization rates across all segments.

During the quarter to augment our content monitoring efficiency, we committed additional reserves to the research and development of our AI processing capabilities. By leveraging the state-of-the-art technology, we can automatically apply thesis of the copyrighted music, events and other content in advance, thus significantly improving both the speed and the currency of our content monetary process. For cloud gaming, we continue to explore new methods of improving users' gaming experience. For example, we reached an initial cooperative agreement with a number of game developers in the quarter to add the beta version of new games directly onto our platform that enable users to try out new games without the need to download any additional application.

As we provided users with convenient gaming experience, we're able to increase our user stickiness and boost our platform traffic. Going forward, we will remain focused on accelerating the development of our cloud games, improve our advertising efficacy and exploring new game distribution model. In addition to our domestic success in China, we maintained the rapid growth trajectory of our Japanese live streaming platform, Mildom, to further solidify our business in Japan. Considering Japan's broad base of gamers and excellent user payment habits, we are quite optimistic about our prospects of generally a sizable return on investment in the Japanese market.

In summary, we're pleased with our financial and operational achievements in the first quarter. Looking ahead, we will continue to build an eSports-centric content community for younger generation; deploy resources, upstream and downstream throughout the eSports value chain; enhance our operational refinement and RMB investment; and optimize our user experience continuously. We also seek to improve our platform's monetization and its operational efficiency through effective product development, streamer management and content operations. As we continue, our preference is for centric content ecosystem, we are confident that we should be able to sustain our platform growth, improve our financial performance and deliver lasting volume to our shareholders over the long term.

With that, I will now turn the call to our vice president of finance, Mr. Hao Cao, to go through the detail of our financial performance in the first quarter.

Hao Cao -- Vice President of Finance

Thank you, Mao Mao. Hello, everyone. I'm very excited to announce that our total revenues in the first quarter of 2020 increased by 53% to RMB 2.28 billion from RMB 1.49 billion in the same period of 2019, exceeding the high end of our previous guidance range. In addition, during the first quarter of 2020, gross margin expanded to 21.3% from 13.6% in the same period of 2019.

Net income increased to RMB 254.5 million from RMB 18.2 million in the same period of 2019. And adjusted net income increased to RMB 296.9 million from RMB 35.3 million in the same period of 2019. Now please allow me to provide you with some more details regarding our key financial metrics. Total net revenues in the first quarter of 2020 increased by 53% year over year to RMB 2.28 billion, with RMB 2.11 billion in live streaming revenues, as well as RMB 165 million in advertising and other revenues.

Live streaming revenues in the first quarter of 2020 increased by 56% to RMB 2.11 billion from RMB 1.35 billion in the same period of 2019. This increase was attributable to our ongoing optimization of interactive platform features which helped to further increase user-streamer interactions, as well as simulate both users' willingness to pay and payment frequency. As a result, our paying users in the first quarter of 2020 increased by 26.2% to 7.6 million from 6 million in the same period of last year. In addition, our continuous refinement of talent agency partnerships and event mechanisms have further boosted the revenue contribution from our platform's daily operations.

Furthermore, the implementation of our operational refinement strategy for different segments also helped improve our monetization efficiency across both gaming and nongaming segments and further increased mid-tier streamers income. Advertising and other revenues in the first quarter of 2020 increased by 22.2% to RMB 165 million from RMB 135 million in the same period of 2019. This increase was mainly driven by our broadening brand awareness and the corresponding increase in demand from game advertisers. Cost of revenues in the first quarter of 2020 increased by 39.4% to RMB 1.79 billion from RMB 1.29 billion in the same period of 2019.

More specifically, revenue sharing fees and content cost in the first quarter of 2020 increased by 47.5% to RMB 1.57 billion from RMB 1.07 billion in the same period of 2019. This increase was primarily explained by two factors: first, increased revenue sharing fees, which basically grew in line with the increases in total net revenues; second, increased investments in both eSports-related content rights and in-house content production, in addition due to a lower unit purchase price and an improved bandwidth utilization efficiency resulting from the further implementation of our self-developed P2P and CDN Technologies. Our bandwidth cost during the first quarter of 2020 decreased slightly by 5.8% to RMB 152.9 million from RMB 162.3 million in the same period of 2019. Gross profit in the first quarter of 2020 increased by 139.2% to RMB 485.9 million from RMB 203.1 million in the same period of 2019.

Gross margin in the first quarter of 2020 expanded to 21.3% from 13.6% in the same period of 2019. Such expansion was mainly driven by our continuous improvements to monetization, streamer costs and bandwidth utilization efficiency, as well as our improved operating leverage as a result of the company's increasing economies of scale. Now turning to our operating expenses. Sales and marketing expenses in the first quarter of 2020 decreased by 13.1% to RMB 107.4 million from RMB 123.6 million in the same period of 2019, mainly due to the exemption of government-mandated social security contribution and reduced office, travel and welfare expenses during the work-from-home period after COVID-19 outbreak.

Research and development expenses in the first quarter of 2020 increased by 17% to RMB 92.9 million from RMB 79.4 million in the same period of 2019. This increase was primarily driven by increased investment in technological innovations, as well as higher share-based compensation to relevant employees, partially offset by exemption of government-mandated social security contribution and reduced office, travel and welfare expenses during the work-from-home period after COVID-19 outbreak. General and the administrative expenses in the first quarter of 2020 increased by 33.3% to RMB 84.6 million, compared with RMB 63.5 million in the same period of 2019, mainly as a result of higher share-based compensation expenses, partially offset by exemption of government-mandated social security contribution and a reduced office, travel and welfare expenses during the work-from-home period after COVID-19 outbreak. Shared-based compensation expenses allocated to operating expenses in the first quarter of 2020 were RMB 41.9 million, as compared to RMB 17.8 million in the first quarter of 2019 and RMB 17.4 million in the fourth quarter of 2019.

Other operating income net in the first quarter of 2020 increased by 11.4% to RMB 16.6 million from RMB 14.9 million in the same period of 2019. Adjusted operating income in the first quarter of 2020, which excludes share-based compensation expenses, was RMB 259.5 million, compared to an adjusted operating loss of RMB 30.6 million in the same period of 2019. Net income in the first quarter of 2020 improved to RMB 254.5 million from RMB 18.2 million in the same period of 2019. Adjusted net income in the first quarter of 2020, which excludes share-based compensation expenses, share of loss in equity method investments and impairment loss of investments, improved to RMB 296.9 million from RMB 35.3 million in the same period of 2019, implying an adjusted net margin of 13% for the first quarter of 2020.

For the first quarter of 2020, basic and diluted net income per ADS were RMB 0.82 and RMB 0.79, respectively, while adjusted basic and diluted net income per ADS were RMB 0.95 and RMB 0.95, respectively. In the coming months, we remain focused on improving our monetization capabilities and efficiencies, as well as further utilizing our operating leverage to pursue the sustainable development of our platform. We expect our total net revenues for the second quarter of 2020 to be in the range of RMB 2.36 billion to RMB 2.41 billion. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change.

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

Questions & Answers:


Operator

[Operator instructions] And the first question today comes from Lei Zhang of Bank of America Securities. Please go ahead.

Lei Zhang -- Bank of America Merrill Lynch -- Analyst

[Foreign language] First, congrats on the strong results. And my first question is about user trend. Can you give us more color on the recent user related trend post people resuming work? And secondly, wondering the COVID-19 impact to our game and nongame content. Thank you.

Shaojie Chen -- Chairman and Chief Executive Officer

[Foreign language]

Mao Mao -- Investor Relations

Hi, Lei. Thanks for your question. I will now have translated about the answers. Actually, in terms of your first question, according to the data from our platform, our total MAUs and the average daily time spent by each active users have remained stable without any significant fluctuance since the gradual work resumption up in China in March.

In particular, our mobile MAUs and user engagement were maintained at high level. This is because users have formed good watching and using habits in our platform in the years of our platform's operation and also the development. And in terms of your second question, although the first quarter is kind of traditional slow season, we implemented productive guidelines to encourage more quality streamers, which help to augment the total live streaming hours as they increase the amount of quality content on our platform, more users were attracted to our platform, especially from the mobile end. The user engagement level further increased as well.

For our gaming segment, the epidemic resulted in an overall improvement of the user traffic in game industry, driving the growth of users for all popular games segment and also the new blockbuster game sectors on our platform during the period. Actually, during the first quarter, our game live streaming segment accounted for about 80% of the total viewership and overall revenue generated from the game live streaming also maintained its rapid growth trajectory. In terms of nongaming segment, active users and also total viewership have remained relatively stable in general during this epidemic, though ensured the abundant production of high-quality content across all segments and satisfied users being preferred through proactive operational refinement. This also helped us increase the user engagement on our platform.

Thank you. Operator, please address the next question.

Operator

The next question comes from Brian Gong of Citigroup. Please go ahead.

Brian Gong -- Citi -- Analyst

[Foreign language] I will translate myself. Thanks, management, for taking my question. Congratulations for the solid results. Can management shared the updated view of the competitive landscape in game live streaming industry? Any change on the competition from question Bilibili and Kuaishou? Thanks.

Shaojie Chen -- Chairman and Chief Executive Officer

[Foreign language]

Mao Mao -- Investor Relations

Thanks for your question. Since the first quarter, the industry's competitive landscape has not changed significantly. As a leading game live streaming platform, though we will continue to build our game-centric content ecosystem, energize our eSports community and explore other related areas such as game shops on Baidu. Since Kuaishou and Bilibili entered into a game live streaming industry, both user traffic and also the user traction have been boosted, which also helped to raise the entire game live streaming market of Bilibili and benefited the industry's development.

From a competition perspective since the forbidden of streamers switching between platforms, the industry has remained a healthy competitive landscape. On top of this, our premium top and mid-tier streamers resources help us create strong content barrier. Therefore, we have more advantage when competing with both existing players and also the new players in the industry. We will also take advantages of our professional product premium content to increase our mobile user traffic and increase our competitive edge.

Yeah. Thank you. Operator, please address the next question.

Operator

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

Thomas Chong -- Jefferies -- Analyst

[Foreign language] Thanks, management, for taking my questions. My question is about the revenue growth trend, as well as the key factors in driving our revenue growth. Thank you.

Shaojie Chen -- Chairman and Chief Executive Officer

[Foreign language]

Mao Mao -- Investor Relations

Thanks for your question. The quarter-over-quarter increase in our live streaming revenue resulted from our ongoing improvement to interactive features, which were made to increase user and also streamers' interactions, also the users' willingness to pay and the users' payment frequency. In the first quarter of 2020, our quarterly paying users increased by 4.1% to 7.6 million from 7.3 million in the fourth quarter of 2019. ARPPU also achieved around 7% quarter-over-quarter increase.

Our refinement of operations across segments helped to improve each segment's monetization efficiency. We also enhanced our development of live streaming content diversification, which improved the monetization efficiency and the revenue contribution of our gaming segment. We increased our interactive functions, such as the streamer PK system which also aim to improve the monetization efficiency of our mid-tier streamers. Our development of monetization activities helped to increase revenue from daily sales-driven events on our platform also.

OK. Thank you. Operator, please address the next question. Thank you.

Operator

The next question comes from Alex Poon of Morgan Stanley. Please go ahead.

Alex Poon -- Morgan Stanley -- Analyst

[Foreign language] I'll translate my questions. My question is related to the game streamers. First of all, can you share with us the risk of concentration of your top streamers? And second is, can you share with us your development strategy for game streamers in the future? And third is about how can we raise the monetization efficiency of the middle layer streamers? Thank you very much.

Shaojie Chen -- Chairman and Chief Executive Officer

[Foreign language]

Mao Mao -- Investor Relations

OK. Thanks for your questions. As we mentioned before, we have signed three to five years contract with top 100 streamers already, that there will be a stable situation in the top streamers on our platform. Moreover, we still keep the strategy which is the top streamers contributing significantly to the premium content and the overall viewership while mid-tier and long-tail streamers help us diversify our content offering and improve the monetization efficiency.

By cultivating the new streamer talent agencies, we'll continuously provide valuable streamer resources to our platform. We have also taken several measures to improve our monetization efficiency of mid-tier streamers. We kept updating our latest functions to enhance our monetization capabilities. According to our efforts, the number and the qualities of our mid-tier streamers kept increasing during the first quarter.

For example, the total number of streamers with revenue above RMB 10,000 per quarter have reached around 40% year-over-year growth. OK. Thank you. Operator, please address the next question.

Operator

The next question comes from Daniel Chen of JP Morgan. Please go ahead.

Daniel Chen -- J.P. Morgan -- Analyst

[Foreign language] I will quickly translate myself. My question is on the PC MAU trend. So PC MAU seems to be declining on year over year and sequential basis in the first quarter. I'm not sure if it's related to the COVID-19? Or is there some other reasons for the decline? And how should we look at the PC and mobile user growth in the next few quarters when the work resumes? Thank you.

Shaojie Chen -- Chairman and Chief Executive Officer

[Foreign language]

Mao Mao -- Investor Relations

Thank you for your questions. Our PC MAUs declined in the first quarter, which was mainly due to the closure of the Internet cafes during the epidemic causing -- actually causing a reduction in Internet cafe PC users. Also some Internet cafe PC users will have looked as their chance for building preference to personal computers or the mobile phones during this period. This trend for our PC MAUs have been raising our expectation.

On the other hand, we actually maintained rapid growth in the mobile MAUs during the first quarter. Such growth actually was mainly driven by the increase in streaming hours, the launch of new quality games and also our continued deepened cooperation with game developers. Actually, if we look at about -- from the second quarter, actually, with continued addressing our platform operation has allowed us to maintain a stable mobile MAU growth. Looking ahead, we think that we will continue to focus on the rapid growing our mobile users.

We also believe that, in general, mobile users actually have a higher level of engagement and also the paying ratio. And the mobile segment of the market, we think it will still have a large growth potential, which should allow us to improve our penetration rate. OK. So thank you.

Operator, let's address the next question.

Operator

[Operator instructions] The next question is from Alex Liu of China Renaissance. Please go ahead.

Alex Liu -- China Renaissance -- Analyst

[Foreign language] Thanks for taking my questions. My question is on the gross margin. We saw the gross margin trend up pretty well in the first quarter of 2020. How should we think about the trend of revenue sharing, content costs and bandwidth costs down the road? Thank you.

Shaojie Chen -- Chairman and Chief Executive Officer

[Foreign language]

Mao Mao -- Investor Relations

Yes. Thanks for your questions. We will maintain our revenue sharing policy at half-half split between platform and also streamer and talent agencies. We will also offer certain incentives to streamers and also the talent agencies during the promotional period.

And therefore, actually, the overall revenue sharing ratio may fluctuate slightly quarter over quarter. As a game-centric live streaming platform, we will continue to invest more in content related to eSports games and also the potential blockbusters games, especially in the top eSports tournament and self-produced premium content. We will also invest more on the overseas streamers and new potential streamers with new game title launches. Overall, the content cost will show an upward trend in absolute value, but it will keep gradually decreasing trend as a percentage of the total revenue.

And also, if you look at about the bandwidth cost, actually, it's mainly due to the user growth on our platform. We should see, if we're looking forward, actually, the bandwidth cost will increase as absolutely value, but it will still keep a rather decreasing trend as a percentage of the total revenue. OK. Thanks for your questions.

Operator

There are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Mao Mao -- Investor Relations

OK. So thank you for joining our call today. We're looking forward to speaking with everyone next quarter.

Operator

[Operator signoff]

Duration: 51 minutes

Call participants:

Mao Mao -- Investor Relations

Hao Cao -- Vice President of Finance

Lei Zhang -- Bank of America Merrill Lynch -- Analyst

Shaojie Chen -- Chairman and Chief Executive Officer

Brian Gong -- Citi -- Analyst

Thomas Chong -- Jefferies -- Analyst

Alex Poon -- Morgan Stanley -- Analyst

Daniel Chen -- J.P. Morgan -- Analyst

Alex Liu -- China Renaissance -- Analyst

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