DouYu International - Q2 2022

Transcript

Operator (participant)

Good morning and good evening, ladies and gentlemen. Thank you, and welcome to DouYu International Holdings Limited Second Quarter 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. We will be hosting a question-and-answer session after management's prepared remarks. Please note today's event is being recorded. I will now turn the call over to the first speaker today, Ms. Lingling Kong, IR Director at DouYu. Please go ahead, ma'am.

Lingling Kong (Director of Investor Relations)

Thank you. Hello, everyone. Welcome to our Second Quarter 2022 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 2022 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 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 expressed are qualified in their entirety by the cautionary statement, risk factors, and details of the company's filing with the SEC. The company undertakes no duty to revise or update any forward-looking statements for select events or circumstances after the date of this conference call. I will now speak on behalf of our Chairman and CEO, Mr. Shaojie Chen. In the second quarter, we continued to explore new growth drivers while increasing our investment in self-produced content.

In addition, we tightened our cost controls and improved revenue quality by structural adjustment of our revenue streams, resulting in a profit turnaround for the quarter. This quarter, our mobile MAUs was 55.7 million. Total net revenues were RMB 1.83 billion, and quarterly paying user count was 6.6 million. By prudently adjusting our copyright procurement strategy and deftly implementing cost control, we increased our gross margin to 6.9%. Meanwhile, we made solid progress in improving operating efficiencies as our adjusted net income reached RMB 23.5 million. I'm pleased to share with you that we have achieved our goal of maintaining stable mobile MAUs from the fourth quarter of the year through the second quarter.

During the quarter, average mobile MAUs was 55.7 million, a decline of 8.2% year-over-year, but an increase of 1.1% quarter-over-quarter. We believe there are two factors at work. First, as we execute on our selective copyright procurement strategy, we have ceased acquiring overpriced content rights for esports tournaments starting in the fourth quarter, which led to a year-over-year decline in MAUs caused by traffic loss from users who primarily view tournaments on our platform. Though the loss in tournament users negatively affected our MAU base, it only had a very limited impact on our revenue. The second quarter of the year is a traditional peak season for official tournaments, with a high number of users on live streaming platforms viewing tournaments compared with the fourth quarter.

Therefore, it is very difficult to stabilize quarter-over-quarter traffic in the absence of certain official tournaments on our platform. However, thanks to our high-quality streamers, segmented and refined content such as self-produced tournaments, we retained all users and attracted new users during the quarter. As a result, our mobile MAUs achieved a sequential increase, indicating that the negative impact of our selective copyright procurement strategy has been fully realized and absorbed by our business. Second, we collaborated with game developers to launch promotional activities to attract new platform users, partially offsetting a portion of the decrease in MAUs that resulted from our no longer purchasing certain copyright content. For example, we launched a promotion in our live streaming channel with the game developer of Peacekeeper, where users can purchase the most popular in-game items within a limited time period.

This promotion successfully attracted a significant number of gamers to participate, which contributed to the growth of new users and galvanized the return of some inactive users. Turning to our content update. During the second quarter, we maintained the effective execution of our strategy of building a game-centric comprehensive content platform, while further investing and innovating in self-produced content. Based on users' differentiated preferences and game features, we collaborated with well-known streamers, game developers, and distributors to customize high-quality IP content shows, further enriching our content ecosystem by integrating live streaming, videos, graphics, and interactive communities. In the second quarter, we continued to enhance the diversified content system for our self-produced tournaments and increased investment in self-produced content with a focus on refining content and operations based on game category. We produced close to 95 esports tournaments in the quarter to meet the differentiated needs of our users.

These tournaments can be divided into two categories. The first of which is professional or streamers tournaments for hardcore gamers. The second category is amateur tournaments for competition between our loyal users, among college students, and casual competitions for light and mid-core gamers. Leveraging our years of experience in operating esports tournaments, our self-produced professional tournaments received widespread acclaim from both game developers and hardcore gamers. During the quarter, our self-produced fifth Honor of Kings Master Tournament was once again selected by the game's developer as its official collaboration partner. For the first time, users were able to participate in this tournament through an innovative combination of online and offline formats, increasing user engagement and creating an Honor of Kings tournament as though it's an intellectual property that can be enjoyed by every user category.

With the popularization and deeper penetration of esports, we have created and developed more unique and differentiated tournaments that are open to all comers. In order to cater to diverse user demands, we organized a variety of differentiated events, including college selective trials to discover top gamers, LOL Team Fans Competition, and the High Five Festival for Honor of Kings. These events attracted both new and regular users by inviting well-known guests to attend, and by using novel methods of competition and unique ways for players to team up. During tournament promotional and hosting periods, we stimulated a second round of active discussion between different platforms and the community by promoting warm-up campaigns and tournament post-match highlights. By doing so, we further enhanced user engagement and created an exciting and absorbing environment on our platform.

Regarding our previously purchased copyright, we continue to collaborate closely with game developers and integrated official tournaments with our live streaming videos, graphics, operating activities, and community discussions to increase user engagement and attract new users. Using KPL Spring Tournament as an example, we self-produced several shows derived from tournament IP content. In addition, the KPL esports team we signed in Wuhan eStarPro won the spring season championship. Going forward, we will continue to execute our selective copyright procurement strategy and make purchases of cost-effective content. We will analyze and evaluate the ROI for each tournament based on metrics such as traffic contribution, revenue contribution, and cost. In addition to tournament content, we continue to create entertaining gaming content. We developed and released China's first live streaming gaming knowledge quiz show, Gaming Expert.

More than 120,000 users participated in the online quiz contest, which attracted over 8 million live viewers. Furthermore, as we increased our investment in high-quality gaming content and the development of our diverse content ecosystem, we continued to refine our operations and successfully raised ROI for our game segments by improving revenue quality and implementing content cost controls. We successfully enhanced our platform's operating efficiency while still delivering innovative premium content and maintaining our advantage in game-centric operations. Now turning to monetization. Our total paying user count in the second quarter was 6.6 million, with an average quarterly ARPU of RMB 276. In the context and trend of promoting rational consumption in live streaming, we proactively adjusted and refined our platform's gifting function and operations. We have been making ongoing changes to maintain compliance with the latest regulation guidelines.

As a result of these modifications, our paying user count and ARPU declined on a year-over-year basis, but remained stable on a quarter-over-quarter basis. As a matter of fact, this adjustment and optimizations actually increased the quality of our virtual gifting revenue and improved sustainability by encouraging healthier paying habits among users. For example, by utilizing customized promotional campaigns based on the preference of different user groups, we continued to stabilize our core users' willingness to spend and enhance the casual and hardcore gamers engagement to cultivate their paying habit. By adopting more sustainable operating strategies, we have been able to maintain a stable paying user base and sustain a healthy range for our ARPU. Meanwhile, we continue to explore and develop our membership services, as demonstrated by a healthy sequential growth in the second quarter since the upgraded Diamond Fans membership system in the previous quarter.

Our membership service is an important interactive tool to maintain the interaction between our streamers and their fans. As such, we continue to release additional value-added features, including streamers' emoticons and Diamond Fans avatars that are exclusive to Diamond Fans and are related to games' unique features and streamers' distinctive characteristics. This has further enhanced the stickiness of fans and increased the willingness of users to subscribe to membership services. Going forward, we will continue to explore new and diversified monetization channels. In terms of technological innovation and development, we have been strengthening our in-depth cooperation with game developers. Last quarter, we cooperated with Dota 2's game developer to share partial gaming data and then employ this data to develop a number of practical functions.

During this quarter, we extended our cooperation scheme so that now we also share partial gaming data with the developer of Honor of Kings. We launched customized features that allow users to actively display game achievements and rankings on our platform with users' consent. By connecting their gaming accounts with their DouYu account, users' game achievements, such as gaming badges, can be displayed when they participate in bullet chat. Sharing gaming information in this way improves user experience by fostering further connection between gamers and streamers in a variety of different scenarios. In addition, our collection of gaming data and platform user behaviors make it possible for us to leverage machine learning technology to provide more accurate content recommendations for game users with different characteristics.

Overall, based on the stable performance of our traditional live streaming business, we increased our investment in self-produced content and optimized our operational innovations to better target and customize our content based on user preferences and game features. Furthermore, we deepened our collaboration with game developers so as to further augment our content offerings of integrated live streaming, videos, graphics, and interactive communities. We're continuing to develop a robust and healthy game-centric ecosystem. In regard to financial performance, we enhanced our monetization capabilities, explored new monetization models, and improved overall operating efficiency by implementing effective cost controls and expense optimizations. Through the consistent ROI enhancement of each game segment, we are realizing our platform's potential for long-term and sustainable growth. With that, I will now turn the call over to our Vice President of Finance, Mr. Hao Cao, to go through the details of our financial performance in the quarter.

Hao Cao (VP of Finance)

Thank you, Lingling Kong. Hello, everyone. Last quarter, we stated that our top priority was to reach non-GAAP breakeven by improving operating efficiency. I'm delighted to see that our performance exceeded our expectations. During the second quarter, our gross margin further expanded to 16.9%, and we recorded an adjusted net income of RMB 23.5 million. This demonstrates the effectiveness of our execution on operating efficiency improvements through refined ROI enhancement and effective cost and expense controls. Total net revenues in the second quarter of 2022 decreased by 21.6% year-over-year to RMB 1.83 billion. Live streaming revenues were RMB 1.77 billion, a decrease of 18.8% from RMB 2.18 billion in the same period of 2021.

The decrease was due to the continued implementation of prudent operating strategies, such as adjustments to certain interactive features and related operational efforts. For the long-term healthy development of our platform, we have made operational adjustments and feature updates in advance, and have been highly responsive to the newly announced guidelines in order to fully comply with regulatory requirements. As a result of these adjustments, virtual gifting interactions were partially impaired, which caused year-over-year decreases in both the number of paying users and quarterly ARPU. However, the number of paying users and quarterly ARPU remained stable at the current level as we continue to stabilize the paying habits of our core users and cultivate the paying willingness of mid to long-tail paying users.

Our quarterly ARPU was RMB 276, an 8.7% decrease from RMB 303 in the same period last year, but a 2.4% increase on sequential basis. Advertising and other revenues were RMB 64.9 million, compared with RMB 158.7 million in the same period of 2021. The year-over-year decrease was primarily attributable to the continued exploration of new commercialization models by using a portion of advertising traffic that could have been directly monetized, as well as the soft demand for advertisements, coupled with the COVID resurgence in China. Cost of revenues in the second quarter of 2022 was RMB 1.52 billion, a decrease of 24.9% compared with RMB 2.03 billion in the same period of 2021.

Revenue share fees and content costs decreased 27.2%-RMB 1.31 billion from RMB 1.81 billion in the same period of 2021, which was driven by several factors. First, the decrease in revenue share fees outpaced the decrease in live streaming revenues, leading to a lower revenue share ratio. This demonstrates the effective execution of prudent operating strategies with a focus on efficiency improvements. Second, the cost of broadcasting rights decreased significantly as we ceased acquiring overpriced content rights for esports tournaments and our selective copyright procurement strategy. Third, other content costs also recorded a year-over-year decline as we continued to optimize in-house content production efficiency.

Bandwidth costs in the second quarter of 2022 decreased by 11.2%-RMB 143.7 million, from RMB 161.8 million in the same period of 2021. The decrease was mainly due to a year-over-year reduction in peak bandwidth usage in the absence of purchased esports tournament copyright. Given that our bandwidth costs are generally billed based on peak bandwidth usage. Meanwhile, the lower per unit bandwidth costs, which benefited from our improved procurement efficiency with major suppliers, also contributed to a decrease in bandwidth costs. Gross profit in the second quarter of 2022 was RMB 309 million, compared with RMB 306.5 million in the same period of 2021.

Gross margin in the second quarter of 2022 expanded to 16.9% from 13.1% in the same period of 2021. Sequential improvement of 330 basis points from the first quarter. This margin improvement was primarily due to the significant decrease in the cost of broadcasting rights as a percentage of revenues as we ceased acquiring overpriced content rights for esports tournaments, as well as the lower revenue sharing ratio, which benefited from improvement in revenue quality and our sustainable operating strategy. Sales and marketing expenses in the second quarter of 2022 were RMB 167.5 million, a significant decrease of 43.2% from RMB 295 million in the same period of 2021.

This was mainly attributable to the decreases in both marketing expenses for user acquisition and personnel-related. Research and development expenses in the second quarter of 2022 were RMB 101.9 million, representing a 17.2% decrease from RMB 123 million in the same period of 2021. The decrease was primarily due to the reduction in personnel-related expenses. General and administrative expenses in the second quarter of 2022 were RMB 90.7 million, decreasing by 11.7% from RMB 102.6 million in the same period of 2021. The decrease was primarily due to the decreased professional service fees.

Adjusted operating income in the second quarter of 2022, which excludes share-based compensation expenses, was RMB 0.3 million, compared with adjusted loss from operations of RMB 165.1 million in the same period of 2021. Net loss in the second quarter of 2022 was RMB 38.8 million, compared with RMB 181.7 million in the same period of 2021. The expanded gross margin and decreased expenses combined to deliver two consecutive quarters of narrowing losses. Adjusted net income in the second quarter of 2022, which excludes share-based compensation expenses, share of loss in equity method investments, and impairment loss of investments, was RMB 23.5 million, compared with adjusted net loss of RMB 145.1 million in the same period of 2021.

For the second quarter of 2022, basic and diluted net loss per ADS were RMB 0.1 and RMB 0.1 respectively, while adjusted basic and diluted net income per ADS were RMB 0.1 and RMB 0.1 respectively. As of June 30th, 2022, the company had cash and cash equivalents, restricted cash, short-term and long-term bank deposits of RMB 6,685 million, compared with RMB 6,643 million as of December 31st, 2021. Going forward, we will focus on delivering sustainable profitability through our continued operational efforts on cost controls and improvement of revenue quality, along with the ongoing improvement of our overall ROIs. We will continue enhancing our monetization capabilities to support the long-term development of our platform. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your questions has been addressed and you'd like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our queue. The first question comes from Lei Zhang with Bank of America.

Lei Zhang (Analyst)

Hi. Thanks management for taking my question. Two questions here. First, any updates on the live streaming regulation launched in May? Can you share with us its impact to our business? Secondly, on your current operation in esports tournaments and any change in our future plan in the licensed esports content? Thank you.

Hao Cao (VP of Finance)

Let me answer your first question. Seven measures were included in the latest regulations on virtual gifting, including protection of minors, ranking systems, and PK filters. After analyzing the guidelines, we believe that the purpose is to guide users to spend rationally by limiting certain features. In the context and trend of promoting rational consumption of live streaming users during May, we implemented a series of measures, such as setting up a spending limit for a single transaction on virtual gifts and a pop-up requesting a second confirmation for each transaction. In June, we continued to update our platform status according to the latest guidelines. These updates included adjusting our ranking system in regards to multidimensional data, limiting PK time during peak hours, and adjusting rewards for PK mode. This adjustment to our operations have led to an improvement in the quality of our revenue.

By implementing positive and healthy operating strategies, our development focus has shifted from generating total revenue growth to creating high quality revenue growth by stabilizing the spending habits of our core users and attracting more mid and long-tail paying users with lower ARPU. We have been carrying out these structural adjustments since the end of 2021. Therefore, we do not anticipate a significant incremental negative impact.

On our overall revenue based on the operating performance since the latest update in June. Thank you.

Operator (participant)

Thank you. The next question comes from Alex Poon with Morgan Stanley.

Lingling Kong (Director of Investor Relations)

Excuse me. Hi, operator. We are still answering the second question. Currently, our esports tournaments broadcasting rights cover a variety of popular games such as Honor of Kings, CrossFire, Dota 2, etc. For these purchased tournaments content, we further diversify our content offerings by integrating live streaming with video graphics and interactive communities to meet our users' differentiated needs. The gaming content industry in China has developed into a healthy growth stage, and we anticipate that the pricing of esports copyrights will gradually fall back into a reasonable range in the near future. Therefore, we will carry on executing our selective copyright procurement strategy. Our bids for those copyright purchases will be based on a thorough evaluation of the monetization capability and the traffic contribution driven by each esports tournament broadcasting rights.

At the same time, we will deepen our collaboration with game developers through utilization of partners resources and joint operations to control content costs. Under this strategy, we are in active negotiations regarding more copyright partnerships with game developers. As we mentioned earlier, esports tournament broadcasting is only one part of our comprehensive gaming content. As viewers get more and more viewing options, we believe differentiated content and refined operations are the key to our platform's stable and healthy growth. Despite the absence of some important esports tournaments, our average mobile MAUs achieved quarter-over-quarter growth, proving that our selective copyright procurement strategy is a step in the right direction. By leveraging our deep understanding of the gaming industry, years of operating experience and the leading live streaming resources, we will continue to expand, deepen our cooperation with game developers.

At the same time, we will fully invest in game-centric, self-produced content, while maintaining our advantages in high-quality content and game operations to stabilize traffic on our platform. Thank you. Operator, we are ready for next question.

Operator (participant)

Thank you. Our next question comes from Alex Poon with Morgan Stanley. Please go ahead.

Alex C. Poon (Executive Director and Analyst)

Thanks management for taking my question. My first question is related to our self-produced content. Can management share their view how we produce self-developed content? How do we ensure the quality of these content? My second question is related to game license approval. Since approval has resumed in April, has that been helping our traffic growth and revenue growth? Thank you.

Shaojie Chen (Chairman and CEO)

[Foreign Language] 刚刚提到的这个自制内容方面，作为一个以游戏为核心的多元化的内容平台，我们的内容是否能够满足用户的需求，还有一个就是我们是否能打造游戏的这个氛围是否浓厚，成为了我们吸引用户和留存用户的关键。所以我们用户呢，是我们最宝贵的资源。从用户的角度来出发，促使我们进行内容侧的和产品侧的一些升级。在游戏内容方面，重度玩家相对关注游戏的竞技性，喜欢这个竞技流的这个主播，还有职业选手。相对的更多的玩家，轻度玩家则更加倾向于享受这个游戏本身，在主播技术实力之外，更享受主播营造的直播间的气氛。因此，我们针对不同的用户喜好，量身定做和制定不同的这个赛事内容。我们针对重度的玩家打造专业的自制比赛，然后通过展示主播的竞技实力，提升赛事的观赏度。其中高校用户是我们在电竞用户里边的很硬核的一部分用户，也是我们平台的核心用户之一。本季度的话，我们举办了王者的摘星赛，与八所知名高校进行了联动，由分区知名的主播担任教练，吸引了高校用户的广泛关注和讨论。然后截止到二季度，斗鱼累计在700所高校举办了700场电竞赛事，在大学生群体中获得了很强的这个号召力和影响力。

Speaker 10

Regarding the self-produced content as a game-centric platform with diverse content, the key to attracting and retaining users are satisfying their viewing needs and creating an engaging community environment for them. Because users are the most important component of our platform, we are motivated to make content and products upgrades from their perspective. In terms of gaming content, different user groups look for different kinds of gaming content. Hardcore gamers focus more on the competitive aspects of games and prefer streamers who are professional and highly skilled. Casual gamers, on the other hand, will have a better experience with streamers can create an enjoyable atmosphere during live streaming. Therefore, we design different tournament content to cater to different user preferences. For hardcore gamers, we produce tournaments which focus on presenting streamers outstanding gaming techniques to provide a professional, skill-oriented viewing experience. A part of hardcore gamers are college students who are also our core users of our platform. In the second quarter, we held Star-Picking Honor of Kings Tournament in collaboration with eight well-known colleges and coached by several famous streamers. It was highly popular and much discussed among college students. Up to the end of the second quarter, we have cumulatively hosted nearly 700 esports tournaments involving more than 700 colleges, giving DouYu's brand strong appeal and influence among college students.

Shaojie Chen (Chairman and CEO)

[Foreign Language] 在刚刚提到的这个除专业赛事以外，在娱乐赛事方面，我们更加注重提升用户的参与度和互动性。我们在本季度推出了LOL战队巅峰赛，专门为广大的LPL战队粉丝量身定制的自制赛事，招募了代表英联盟十六支职业战队和四百五十多名粉丝，让他们能够在赛场上为自己热爱的战队赢得荣誉。作为行业内首个规模化的大型粉丝赛事，我们邀请了LPL专业的赛事解说和职业选手担任赛事解说，增强了赛事专业性和观赏性。此外，在本季度举办了王者荣耀的五五开黑节，我们邀请了脱口秀艺人、人气主播、玩家、粉丝等群体，然后通过直播间快速组队的新颖互动方式，打造了一场主播、用户、平台和厂商之间的狂欢活动。

Speaker 10

When organizing entertainment based tournaments, we focus on enhancing user engagement and interaction. During the quarter, we produced the top LOL fans tournament, which was designed for fans of League of Legends Pro League. We recruited more than 450 fans representing sixteen professional LPL teams, then gave them the stage to honor their favorite team by fighting for victory in the tournament. As the first large-scale fan tournament in the industry, we invited professional LPL commentators and professional players to commentate on the tournament, adding depth and authoritativeness to the viewing experience. In addition, we also hosted the High Five Festival for Honor of Kings and invited stand-up comedians, popular streamers and fans to team up playing the game while they live stream. This casual event naturally became a huge party involved streamers, users, platforms and game developers.

Shaojie Chen (Chairman and CEO)

[Foreign Language] 我们在多元化的赛事体系中，在当前的阶段，充分融合了直播为主，然后视频、图文和社区讨论内容服务的多元立体的内容结构，在策划预热、赛中赛后各个阶段不同的载体进行站内外传播。从平台的游戏分区数据表现来看，赛事期间游戏的分区数据、观看时长和单位活动较往日都有一定的增长。

Speaker 10

We have now fully integrated our product streaming content within our diverse, tournament content system, coupled with videos, graphics and community discussion. This comprehensive content system supports various promotions through different mediums, different platforms, and at different stages during this event and achieve solid results. We have observed growth in viewing traffic, longer viewing hours, and more interactions using bullet chat during our self-produced tournaments when compared to the typical levels in this gaming segment.

Mingming Su (Chief Strategy Officer)

Let me answer your second question about the new game abroad.

We were pleased to see the reception of new games abroad. It seems that the gaming market is developing towards diversification and sophistication, based on the genre and numbers of recently approved games. In the long run, we believe that this development will be beneficial for the gaming industry and for gaming content platforms like DouYu. As high quality games and engagement gamers are our primary source of content and users. As more new games are being approved, game developers are starting to resume promotional campaigns in response to new games release. We adjusted our focus from generating advertising revenue to deeper collaboration with game developers. By providing support through our products, content and resources, we help developers increase their game exposure and improve download conversion rates while increasing our competitiveness in the industry. For example, two new games we promoted in the second quarter, LOL Esports Manager and Life is a Party: QQ Xuanwu 2, achieved encouraging results in terms of number of gameplay registrations and activations. Thank you. Operator, please next question.

Operator (participant)

Thank you. Our next question comes from Thomas Chong with Jefferies.

Thomas Chong (Regional Head of Internet and Media)

[Foreign Language] 晚上好，谢谢管理层介绍我的提问。我们一开始其实都提到我们从这个版权的采购的一个战略都是对我们的MAU的负面的影响呢，已经解决了。管理层可不可以再多介绍一下我们在这一方面的工呢？Thanks management for taking my question. We have just talked about our copyright content procurement strategies and the negative impact to MAU is gradually fade out. Just want to get some more color about the work that we have done to achieve this outcome. Thank you.

Shaojie Chen (Chairman and CEO)

[Foreign Language] 是这样，我们在确定执行这个选择性采买赛事版权的这样一个策略的同时，放弃了采购部分价格过高的这种赛事版权。之前我们预计会损失一部分主要观看赛事的用户，所以这一方面我们提前做了很多稳定流量的这个工作安排，例如比如加入我们一些自制内容的投入。另一方面呢，持续对于没有赛事版权的这个游戏的这个分区的数据进行跟踪，并相应地快速地调整内容供应方案。我们在相对应的策略下，让平台的整体的MAU表现好于我们之前的预期，特别是二季度。我们在一季度制定的预案中，因为二季度相对一季度会有更多更重要的这个赛事的出现，所以二季度原预期移动MAU会继续环比下滑，但实际的结果是稳定增长。

Speaker 10

When we made the decision to execute our selective copyright streaming strategy, we expected that we would lose some users who primarily watch official tournaments on our platform in the absence of some overpriced tournaments. We went forward with the move as part of our overall strategy to stabilize traffic, such as increasing our investment in self-produced content. Meanwhile, we kept close track on the performance of the game segments that lacked official tournaments in order to swiftly adjust our content offerings and operations. Thanks to these countermeasures, our platform's mobile MAUs performed better than we had anticipated, especially in the second quarter, during which more official tournaments were held and we see a quarter-over-quarter increase in mobile MAUs as opposed to an expected decline.

Shaojie Chen (Chairman and CEO)

[Foreign Language] 而且我们在用户行为的表现也符合我们先前的预期。流失的大部分的MAU是平台上以观看赛事为主的用户。平台的主要流量来源于长期稳定和持续的观看主播内容的用户。这类用户的留存高，观看时间也长，用户量也是最大的用户体量，对优质的主播内容有很强的粘性。基于稳定的主播内容结构，我们联合不同特色的主播，加强与厂商的深度合作，推出了创新性的内容和丰富的运营活动。在英雄联盟分区，我们推出了一系列专业以及娱乐整体自制的内容，观看时长和互动数据也保持稳定。在和平精英分区，我们联合制造商推出了直播限时道具的促销活动，不但吸引了新的用户，在自制内容观看的时长和互动数据上也显著有提高。由此可见，我们成功地通过优质的主播资源和自制内容配合平台运营，既稳定了核心用户，也吸引新用户。所以我们认为缺乏部分赛事版权所导致的负面影响已经化解。

Speaker 10

Moreover, user behavior has been consistent with our expectations. Most of the MAU decline we experienced as a result of our new copyright procurement strategy were users who came to our platform, mainly watch official tournaments. Our platform's main source of traffic, on the other hand, are long-term continuous stable users who came to watch streamers content. This large quantity of high quality users are characterized by their high retention rates, longer viewing hours, and stickiness to high quality live streaming content. Leveraging our stable streamer structure, we work with streamers of different characteristics to launch creative content and diversify our promotional activities based on the different collaboration with game developers. In the LOL segment, we launched a series of promotional and amateur tournaments so as to maintain the number of viewing hours and interactions for our self-produced content at a stable level.

In the Peacekeeper segment, we collaborated with game developers to launch limited promotions for in-game items during live streams. This not only attracting new users, but substantially increased the number of viewing hours and the interactions of self-produced content. Since we have successfully stabilized our core user base and been able to attract new users through combined operations of utilizing premium streamer resources and self-produced content, we believe the negative impact from the absence of certain tournament copyrights has fully absorbed. Operator, next question please.

Operator (participant)

Thank you. The next question comes from Yiwen Zhang with China Renaissance.

Yiwen Zhang (Analyst)

[Foreign Language] 好的，我是华兴资本，谢谢接受我的提问。我这边两个问题，第一个是咱们在 prepared remarks 也说到咱们会进行一些更多的商业化的探索，可不可以详细介绍一下，比如说咱们的会员业务的进展，还有一些其他业务的探索的一个进展。然后第二个问题是关于咱们的一个毛利率，因为看到这季度毛利是有个比较明显的提升，想请公司介绍一下主要的一个驱动力是什么，然后有多少是来自于一个版权成本的节约，然后我们应该怎么样看全年毛利的一个趋势。Thanks for taking my question.

Speaker 10

I have a couple questions first regarding the monetization. In prepared remarks, you mentioned we are exploring a more diversified monetization. Can you discuss like, in more details, for example, what's our latest progress on our membership is? And other monetization we are exploring. And then secondly, on our gross profit margin, we note a solid improvement in this quarter. Can you discuss the drivers behind, for example, how much is attributable to the content cost saving? And how should we look at the whole year gross profit margin trend? Thank you.

Hao Cao (VP of Finance)

As to the first question about new business model, we have been exploring new models of commercialization with the goal of both increasing virtual gifting revenue and exploring other revenue streams beyond virtual gifting. Here are some examples. In the last quarter, we upgraded our Diamond Fans membership system, which is designed to increase virtual gifting revenue by enhancing engagement between Diamond Fans users and streamers. Upon membership subscription, users gain access to additional value-added services and gain more opportunities to interact with streamers based on the gaming scenarios. Streamers provide exclusive in-game advice, services, and rewards for Diamond Fans users. This quarter, we improved the system by providing more customized features for users based on streamers' characteristics, which further enhanced users' loyalty and improved membership's paying ratio. Number of membership subscriptions grew healthily quarter-over-quarter, with steady improvement of renewal rates.

Going forward, we will build an integrated membership system that offers platform privilege, interactivity with streamers, and game benefits in a single package. In addition to the service we offered on platform, we will also strengthen our collaboration with game developers to provide more value-added benefits for Diamond Fan users. In terms of advertising models, we continued to refine the aforementioned smart distribution system as a supplement to traditional direct response advertising and display advertising. The current goal of this system is to improve the conversion rate from game viewership to game downloads. Our smart distribution system platform enables game developers to release promotional tasks while allowing streamers to choose their preferred method for promoting games. This lets streamers enjoy greater flexibility while fulfilling their task-based promotional obligations.

So far, the system is progressing well and has proven to be effective, both in promoting version updates and galvanizing the return of inactive users to mature game titles. About the second question on margin and cost structure. The decrease in cost of revenues is mainly attributable to a 27.2% year-over-year decrease in revenue share fees and content costs. The year-over-year decrease in revenue share fees is mainly the result of decreased live streaming revenue, and also a small decline in overall revenue share ratio. Since the beginning of this year, we have been implementing more sustainable and steady operating strategies, which are meant to guide live streaming users to spend rationally. We focused on improving operational efficiency to improve our revenue quality by reducing those of our operations with poor revenue generation.

As a result, revenue sharing ratios have declined for two consecutive quarters. We expect that our overall revenue share ratio will remain at a current healthy level, with only slight fluctuations between quarters as we further adjust our revenue-generating operations. The decrease in content costs mainly resulted from lower copyright fees, optimization of streamer payroll, and a reduction in self-produced content costs. The reduction in copyright costs was mainly the result of us ceasing our acquisition of certain large scale tournament content rights, such as LPL. In terms of streamer payroll, we have been continuously optimizing our streamer resources for some segments, leading to a year-over-year decrease in the second quarter. On the self-produced content front, as we utilize a variety of methods to reduce our costs, such as resource integration and joint operations.

We continue to focus on the improvement of content quality rather than quantity. As a result, we were able to launch more self-produced tournaments while lowering production costs on a year-over-year basis. Looking forward, we will prudently evaluate our procurement decisions for large-scale tournaments, optimize our streamer payroll structure, and increase our investment in self-produced tournaments and PGC content, for which we control the related production costs. We expect a certain degree of decrease in our content costs this year. Overall, we expect our gross margin will improve at a modest pace for the year 2022.

Lingling Kong (Director of Investor Relations)

Thank you. Operator, we are ready for next question.

Operator (participant)

Thank you. The next question comes from Brian Gong with Citigroup.

Brian Gong (VP and Equity Research Analyst)

I will translate myself. Thanks, management, for taking my question. We have recorded a decent decline on our OPEX. Can management share the drivers behind the latest and the trend in the second half of this year in the future? Thank you.

Hao Cao (VP of Finance)

In the second quarter, overall operating expenses decreased on a year-over-year basis. Among which, sales and marketing expenses showed a significant decrease as compared to the heightened promotional expenses for new products and features in the same period last year. At present, we are performing continuous and cost-efficient data analysis to select the appropriate promotional channels to increase marketing efficiency. We expect our promotional costs to remain at a current level for the foreseeable future. Besides the above-mentioned marketing expenses, a major component of our operating expenses is payroll. This quarter, we adjusted and optimized our staff structure according to evaluations for each division. Overall, we achieved a certain level of cost saving on payroll expenses year-over-year. For the remainder of the year, we will further optimize payroll expenses and operating expenses, while ensuring stable business operations, allowing us to gradually realize a narrowed net loss. Thank you.

Operator (participant)

Thank you. That's all the time we have for questions. I will now turn the call back over to management for closing remarks.

Lingling Kong (Director of Investor Relations)

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

Operator (participant)

Thank you. That does conclude the call today. Thank you everyone for attending. You may now disconnect.