Good morning and good evening, ladies and gentlemen. Thank you, and welcome to DouYu International Holdings Limited Second Quarter 2023 Earnings Conference Call [Operator Instructions]. I will now turn the call over to the first speaker today, Ms. Lingling Kong, IR Director at DouYu. Please go ahead, ma'am..

Thank you. Hello, everyone. Welcome to our second quarter 2023 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 2023 financial results on our IR Web site 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 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.

I will now speak on behalf of our Chairman and CEO, Mr. Shaojie Chen..

Star Rail, we were deeply involved in the game developers' large-scale off-line activities. And we were the only live streaming platform invited to join the undertaking. Based on the game's product features, we tailored an array of game segment activities specifically for AGC users.

Through online and off-line interactions and audience benefits, we successfully attracted more users to our platform. In the second quarter of 2023, we optimized our content metrics while also enhancing our content management review and progress across the platform. First, we upgraded the review criteria, adding and refining over 30 items.

Second, we applied innovative review technology improving technical features such as content monitoring, filtering and event-triggered handling. Third, we strengthened our management system and staff training and evaluated the awareness of content management and regulatory guidelines.

We will further enhance the company's procedure and operational compliance programs to provide our users with better content and service offerings, improve user experience and continuously optimize the healthy system of our game-centric community. Moving on to our monetization strategies.

The number of quarterly paying average -- the number of quarterly average paying users in the second quarter was 4 million, with a quarterly ARPU of RMB326. The reason for the change in the number of paying users are threefold.

First, as we executed our strategy of fostering a healthy, sustainable game-centric community ecosystem, we reduced some of our revenue-generating activities to level up the platform, including canceling marketing activities aimed at attracting new paying users.

Second, on the revenue side, we improved our operating efficiency by scaling down low-gross-margin operating activities. Third, the decrease in our overall user base was partially the result of reduced marketing spend.

To some extent, these adjustments affected our users' willingness to pay, including both new users and price-sensitive users, resulting in an overall decline in paying users. Nevertheless, we shifted our focus to upgrading our revenue-generating products and maintaining our co-paying users.

Internal data show that, in the second quarter, our co-paying users maintained stable spending habits, as reflected in our quarterly ARPU which rose both year-over-year and quarter-over-quarter. In terms of traditional virtual gifting, we launched our brand-new user profiling system based on how much they spend.

Any user that spends over a certain threshold is automatically entitled to exclusive user privileges such as identity marks and exclusive services. These identity-based privileges are automatically granted each month, which improved our paying users' experience and fortified their stickiness.

Apart from virtual -- traditional virtual gifting, we continue to iterate and upgrade membership functions and benefits. Our membership business, which represents a sustainable source of revenue for us, is also on track towards steady growth.

This added benefits to our members' testament to how much we care about our co-paying users as well as our sustainable relationships with them. Over the past quarters, we have developed a DouYu service system featuring platform-wide memberships and game-specific memberships.

Based on our platform-wide membership service, in the second quarter, we offered additional cost sale membership benefits to users. Specifically, with each purchase of a platform-wide membership in certain game streamers', live streaming channels, users get certain in-game items and game-specific benefits for free.

Owing to the complimentary benefits of our DouYu membership system, our users became more actively engaged and willing to pay.

We also rolled out innovative privileged gifts such as gifts with sound effects customization, revamping our revenue-generating products to elevate user interaction with streamers and to maintain good vibes across our live streaming channels.

In general, our membership renewal rate has been steadily on the rise for several consecutive quarters, demonstrating our consistent optimization of the co-paying users ecosystem.

In terms of our product R&D and functionality innovation, in the second quarter, we launched our all-new big data system for streamers analysis featuring real-time interaction, statistics and analysis of data on their live streaming content, hours, bullet chats, user traffic changes, et cetera.

The system enabled our operations support team to provide timely measure of the streamers' performance against the various indicators so that we can better support our streamers with more precise feedback data.

The system's built-in algorithms enable visualization of the streamers' live streaming data from multiple perspectives, providing data support for operational decision-making.

With the system, our operations support team can directly capture high-quality contents across videos, images and bullet chats from the streamers' live streaming channels, which helps us identify content that best appeals to audience, for more effective recreation, enhancing the visibility of high-quality contents. In conclusion.

We remain committed to executing our core growth strategy of fostering a vibrant game-centric content ecosystem. Our key objective is long-term sustainable growth.

As we work to enhance our ecosystem, we remain focused on maintaining the scale and quality of our core users, attracting more high-quality users to our diverse and growing content, fortifying user interaction and stickiness through innovative operations and stimulating community-wide interactions.

Looking forward, we will continue to explore more commercialization channels and new growth avenues while maintaining our leading position in the domestic gaming content industry. With that, I'll now turn the call over to our Vice President Finance, Mr. Hao Cao to go through the details of our financial performance in the quarter..

Thank you, Lingling. Hello, everyone. In the second quarter, we continued to implement our refined growth strategy aimed at ensuring a healthy and balanced business outlook.

Emphasizing the development of healthy-margin business and optimizing operations, we continued to adjust our revenue-generating activities and streamlined operating efficiencies, including those that optimized content costs and further reduced marketing spending.

As a result, despite some short-term impact to our revenue, we once again grew our adjusted net profit, showing a solid increase quarter-over-quarter. Let's now look at our financial performance in more detail. Total net revenues in the second quarter of 2023 decreased by 24.1% year-over-year to RMB1.39 billion.

Live streaming revenues were RMB1.26 billion, a decrease of 28.8% from RMB1.77 billion in the same period of 2022. The decrease was mainly attributable to ongoing operational adjustments in our live streaming business to promote a healthy and sustainable ecosystem in a more cost-effective manner, as well as the challenging macro environment.

These adjustments impacted spending from new paying users and price-sensitive paying users, combined with a lower user base caused by scaled-back promotions, we saw a year-over-year decrease in the total number of paying users.

Amid changes, our core paying users exhibited relatively stable paying behavior, contributing to an 18.2% increase in ARPU to RMB326 in the second quarter, up from RMB276 in same period last year. Advertising and other revenues were RMB133.9 million, an increase of 106.5% from RMB64.9 million in the same period of 2022.

The year-over-year increase was primarily attributable to the increase in other revenues contributed by game-specific membership services. Cost of revenues in second quarter of 2023 was RMB1.2 billion, a decrease of 21.1% compared with RMB1.52 billion in the same period of 2022.

Revenue-sharing fees and content costs decreased by 25.4% to RMB0.98 billion from RMB1.31 billion in same period of 2022. The decline was primarily driven by a decrease in revenue-sharing fees, which were largely aligned with the decrease in live streaming revenues.

The decrease was partially offset by an increase in copyright costs resulting from the purchase of LPL tournament copyright. Bandwidth costs in the second quarter of 2023 decreased by 17.3% to RMB118.8 million from RMB143.7 million in same period of 2022. The decrease was mainly due to enhanced efficiency of peak bandwidth usage.

Despite a year-over-year increase in peak bandwidth usage as a result of the rising tournament viewing demand, we managed to control bandwidth costs through dynamic bandwidth allocation strategies and other optimization measures. Gross profit in second quarter of 2023 was RMB188.9 million compared with RMB309 million in same period of 2022.

The decrease in gross profit was mainly attributable to decreased net revenues and increased other costs. Other costs include the costs of game-specific membership services, which grew largely in line with the increase in other revenues. Gross margin in second quarter of 2023 was 13.6%, compared with 16.9% in same period of 2022.

The decrease in gross margin was mainly attributable to the increase in other costs as a percentage of revenues, which was partially offset by the decrease in percentage of revenues attributed to revenue-sharing fees.

Sales and marketing expenses in second quarter of 2023 were RMB87.1 million, a significant decrease of 48% from RMB167.5 million in the same period of 2022. This was mainly attributable to a decrease in marketing expenses for user acquisition.

Research and development expenses in second quarter of 2023 were RMB71 million, representing a 30.2% decrease from RMB101.9 million in the same period of 2022. This decrease was primarily due to a decrease in personnel-related expenses.

General and administrative expenses in the second quarter of 2023 were RMB46.9 million, a drop of 48.2% from RMB90.7 million in the same period of 2022. The decrease was primarily due to decreased share-based compensation expenses, as the shares and our share incentive plans were fully vested.

Loss from operations significantly narrowed to RMB7.5 million in second quarter of 2023 from RMB30.6 million in same period of 2022. Net income in the second quarter of 2023 was RMB6.8 million compared with a net loss of RMB38.8 million in same period of 2022.

Adjusted net income, which excludes share-based compensation expenses, the share of loss or income in equity-method investments and investment loss -- impairment loss of investments, was RMB61.4 million in second quarter of 2023 compared with RMB23.5 million in the same period of 2022.

For the second quarter of 2023, basic and diluted net income per ADS were both RMB0.02, while adjusted basic and diluted net income per ADS were both RMB0.19.

As of June 30, 2023, the company had cash and cash equivalents, restricted cash and short-term and long-term bank deposits of RMB7.06 billion compared with RMB6.81 billion as of December 31, 2022.

Going forward, we remain committed to stabilizing our core business operations while actively seeking opportunities to enhance our monetization capabilities and explore more commercialization channels.

By improving revenue quality and maintaining a prudent cost management approach, we aim to support the long-term healthy development of our platform with sustainable profitability. This concludes our prepared remarks today. Operator, we are now ready to take questions..

[Operator Instructions] Today's first question comes from Lei Zhang with BofA Securities..

The question is on regulatory environment. We noticed that we have a regulator on-site review in May.

Any updates on this? And how should we look at the current regulatory environment and the impact to our business?.

During the one month on-site inspection by the Hubei Brew of China's Cyberspace Administration Working Group, the working group provided supervision and guidance on various matters.

Our team was in complete cooperation and readily represented any company information that was requested, such as our policies and procedures for content review and our content approval review process. We also took this opportunity to continue to enhance the capabilities and skill sets of DouYu's content-related support team.

During the inspection period, our business operations continued as [euro]. After the conclusion of the inspection, we have continued to make improvements to relevant rules and procedures across our platform.

More specifically, as we discussed earlier, we improved our content management procedures, particularly on those related to content monitoring, review and approval. We are now back in our normal internal supervision mode, which has been strengthened by the continued improvements we have made to our internal progresses.

In general, regulators have been strengthening and improving their supervision of the live streaming industry. Our goal is the long-term healthy development of our platform.

We actively cooperate with regulatory authorities and are committed to fulfill regulatory responsibilities for the safe operation of our users, such as content monitoring across our platform.

We have actively participated and examined multiple special remediation actions by regulators, including the nationwide [Foreign Language] campaign to purify the online environment, the fight against the cyber bullying and cyber rumormongering, the cyber protection initiative to provide a clean online environment for [players] and the remediation programs that flag streamers and associated accounts engaged in prohibited activities.

Our regular internal supervision mainly includes the review, approval and control content on a daily basis; as well as enacting special remediation actions, regular disclosure of typical cases; et cetera.

Through the DouYu security center, we will regularly disclose the results of sections that were implemented and announced and update any special remediation actions that we've taken. We have also built compliance awareness across the platform through compliance training and DouYu classroom and anti-fraud lectures.

And we are continually optimizing the cyber environment across our platform. Going forward, we will continually strengthen our compliance programs and regulate our operation across the platform.

We will also continue to optimize the content ecosystem and increase our investments in high-quality tournaments and programs that spread positive energy and other quality content. These combined efforts are aimed at fostering a harmonious and healthy live streaming environment..

And our next question comes from Thomas Chong at Jefferies..

My question is that there's a number of hit games coming online this year. I just want to get a sense about how these new games can drive our user growth as well as our revenue..

Star Rail, we captured its ACG attributes and participated in [Ni Hao] anime event. Our combined online and off-line content operations help us attract more user addition. Looking ahead to the second half of the year. The domestic launch of Valorant and its official tournaments of -- are major operations project for us.

As users typically enjoying watching competitive games, Valorant is a great fit for live streaming, empowered by our resources of high-quality streamers and [Indiscernible] tournament content, we were glad to see our remarkable search in both segment-specific traffic and viewing hours after the game's initial release.

We have thoroughly assessed the new games that are scheduled to be released in the second half of the year and have operation plans in place to ensure proper allocation and rapid integration of our resources to support this new game launch.

Our planned promotions and operational support for the new games place us in a strong position to capitalize on the game promotions going together to acquire more users..

And our next question comes from Henry Sun with JPMorgan..

My question is about your operating strategies.

Could management share the progress and the target of our operating strategy adjustments?.

As I have mentioned in our previous earnings calls, considering the changing market dynamics across our industry in the past two years, we remain committed to our key objective of long-term sustainable health growth.

For our traditional business, we ensured stable fundamentals, optimize our operating efficiency and successfully improved profitability. And for new business, we have been exploring potential areas for growth based on user needs. After two years of exploration and implementation of our operating strategy, we have made meaningful progress.

First off, on user acquisitions, we transitioned from channel promotions that target growing market to a content-driven approach that attracts users in mature markets. We have been building a diverse product system since 2020.

By strengthening our in-depth cooperation with game developers, we have evolved from a single-content live streaming format to a successfully developed multilayer content system that includes live streaming, videos, graphics and community interactions. And we continue to enrich our content to enhance our content operations.

DouYu has gradually formed a positive cycle of content production and user growth. Based on the content system, we have directed more attention to maintaining our core users. In the first half of 2023, the average monthly viewing hours of mobile users showed an increase from the second half of 2022.

This reflects the positive effects of our strategy to focus on improving user quality and the gradual optimization of our platform's ecosystem. Second, on the revenue front, to achieve our goal for the platform's long-term development, we have been making adjustments to our operating strategies for some time.

We have reduced our operating activities that target revenue growth so that our streamers can concentrate on the production of high-quality content. As a result, our users found it easier to consume content and have become more willing to engage in paying behaviors, which has also invigorated our platform's ecosystem.

We have also upgraded our revenue-generating products to help maintain our core paying users and keep our overall revenue stable. Additionally, to improve the company's revenue structure, we explored new potential sustainable revenue streams.

By stabilizing our revenue scale, we were able to further reduce our low-ROI virtual gifting activities and improved the platform's overall operating efficiency by operating -- by optimizing our costs and expenses. We are glad to see progressive improvements in both gross margins and adjusted net margin as a result.

In addition, over the second half of 2023, we plan to improve our gaming community ecosystem in various ways. This includes increasing our investment in algorithms used for content-based recommendations to provide more targeted content that better fit our users' diverse preferences, thereby improving the efficiency of content utilization.

We will also prioritize operations that enhance community features through product updates, operational innovation, et cetera, to foster a positive community admixture for gamers across the platform, further enhancing user engagement and stickiness.

Product updates, content investments and the exploration of new models all require time and patience to bear fruit. Through trial and error and subsequent improvement, we believe the effectiveness of our operational strategies will become more evident.

Of course, adjustment to revenue and expenses have an immediate impact on our financial performance, especially amidst the current macro uncertainties. Against this backdrop, we expect our revenue to experience short-term pressure, but we are prepared for this. And we'll control costs and expenses to secure our long-term profitability..

And our next question today comes from Raphael Chen with BOCI Research..

I have two main questions. Firstly, we have noticed recently a top host left the platform after his contract expired in end July.

Could management share some latest updates on the stability of other hosts on the platform? Also, could we have more color on the measures that platform takes to motivate these hosts? My second question is related to MAU and paying user trend.

Could management give some color regarding the MAU and paying user trend in the near to mid-term, given current visibility?.

First, under our overall stream operations strategy, we are strengthening streamer collaborations and depending our cooperation with game developers. We regularly roll out innovative high-quality content and operational activities to maintain and increase user activity in our game segment.

And the streamers have become more willing to go on live streaming sessions, with notably more new games launched in the first half of the year, we worked on an array of streamer recruitment recall and [Technical Difficulty]. Let me continue to answer your first question, about the streamer stability.

With notably more new games launched in the first half of the year, we worked on an array of streamer recruitment recall and growth programs through operating activities supported by game developers.

We have added new resources to the platform streamer pool, offering additional content for new games so that the streamers can grow and prosper in more diverse ways. As part of our normal course of operations, we launched more streamer -- streaming programs as well as various offline activities featuring streamers.

We effectively promoted user interactions, made our streamers more popular and enhanced our live streaming sessions. Our second effort has been on the commercialization front. Through multi-dimensional products upgrades, we enhanced the interaction between streamers and users and further optimized our paying users ecosystem.

For example, we added the gift collection and display functions such as gift collection display and gift photo book. Users giving gifts for the first time and the user who gives the most gifts are immediately centered on live streaming channels. And all the gift given to streamers are displayed on the user interface.

We also upgraded our user profiling system in the second quarter, highlighting paying user privileges, and further improved paying user experience. These product upgrades facilitated better streamer-user interactions, expanding our monetization opportunities. Additionally, we provide streamers with more live streamings more than the management tools.

Our content production tools help streamers improve their live streaming quality and efficiency. Our big data energy indices enabled us to better support our streamers with more precise and quick data feedback to optimize live streaming content and operations. Overall, streamers are the heart of our valuable high-quality content.

We implemented a complete system for streamer recruitment, training, growth, management and cooperation, making sure that our streamers are actively engaged and well compensated. Our enhanced operations have also strengthened our relationships with streamers. Let me answer the second question, about the user trend.

Our operating strategy is focused on long-term sustainable growth across the platform. Regarding revenue, we reasonably adjusted our live streaming revenue-generating activities and reduced promotion frequency, which may squeeze out some users and some paying users in the short term. Let me explain this in more detail.

First, the quarter-on-quarter decline in MAU was mainly the result of our significant reduction in marketing expenses for promotions and consequently the loss of some low-quality users. Our analysis indicates that most of the user attrition was from users who spend a short time on the platform.

As a result, the changes in MAU will not significantly affect our platform's content operations and monetization efficiency. Looking at the second half of the year, we will continue to execute our prudent marketing strategy.

As the impact of our upcoming product upgrades and user behavior is still unknown, we expect MAU to remain at current level in the second half of the year, with some degree of fluctuation. Second, regarding paying users. The number of paying users was influenced by both internal operations and external macro environment.

According to our analysis, the change in paying users in the first half of the year was mainly attributable to our internal operational adjustments. These adjustments included reduced marketing expenses for customer acquisition and decreased purchasing from some users relying on low-ROI marketing activities that we canceled.

These changes resulted in a decline in the overall number of users and paying users. We believe that the upgrades we have made to our revenue-generating products will enhance our ability to maintain our core paying user. That being said, we have stabilized the number of paying users within a comfortable range.

Looking into the second half of the year, we believe that the macro environment could further affect our paying user base. So far, there is still no sign of a strong macro recovery. Users purchase readiness has declined and users are more cautious about discretionary spending.

Therefore, we anticipate that, in the second half of the year, macro uncertainties may lead to slight fluctuation in the number of paying users. As we said, based on operational adjustments, with a focus on investing in content which offers more sustainable growth. However, it may -- takes more time to see the benefit of these investments.

Meanwhile, we will continue to closely track our operational adjustments progress, and we look forward to keeping you updated..

And our next question comes from Cathy Tang at Morgan Stanley..

Could you suggest how the company could improve the profitability through operational adjustments? Also, could you share with us a profitability outlook for the second half this year?.

We are managing the macro uncertainties by more effectively controlling our costs and expenses, and we plan to further stabilize and improve the profitability of our traditional live streaming business. We will also focus on identifying and developing new areas within our innovative business.

We plan to work with game developers on all fronts, fully leveraging the traffic and content resource advantages we have accumulated within our traditional live streaming business to further diversify and empower our commercialization capabilities.

These coordinated efforts are aimed at fostering long-term sustainable profitability and development across our platform..

Thank you. And this is all the time we have for questions. I will now turn the call back over to management for closing remarks..

On behalf of the management, thank you for joining our call. We look forward to speaking with everyone next quarter..

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines. And have a wonderful day..