DouYu International - Q3 2022

Transcript

Operator (participant)

Good morning and good evening, ladies and gentlemen. Thank you and welcome to DouYu International Holdings Limited third quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. We will begin 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 Third 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 third 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 know 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 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 filing 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. During the third quarter, we continued to innovate game content and optimize our operational model.

We both retain our current user base and attract new users by developing high-quality content while optimizing each game segment's rate of return by enhancing existing value-added services and launching new ones. We achieved a second consecutive quarter of profitability on an adjusted basis as we stabilized our revenues, improving revenue quality while augmenting our cost controls and optimizing expenses. This quarter, our MAUs numbered 57.1 million, and total revenues were RMB 1.8 billion. Our quarter paying user count was 5.6 million, and adjusted net profit reached RMB 25.7 million. This quarter, our average mobile MAUs was 57.1 million, a decline of 7.7% year-over-year, but a 2.5% increase quarter-over-quarter.

Our steady growth in MAUs for two consecutive quarters demonstrate that the negative impact of our selective corporate procurement strategy has been absorbed. Looking back on the 3rd quarter, the changes in MAUs was driven by two factors. First, the execution of our selective corporate procurement strategy led to a year-over-year traffic loss from users who primarily viewed e-sports tournaments on our platform. This led to a decline in MAUs beginning in the 4th quarter of this year. However, we were able to stabilize traffic by increasing our investment in self-produced content. The combination of high-quality tournament-related content and streamer content on our platform has helped us retain existing users and attract new ones.

For instance, the launch in September of our top streamers tournament in the League of Legends gaming segment was a showcase event for our users, and demonstrated the potential of investing in self-produced content. Second, we continue to innovate our membership services, emphasizing their value as an avenue for exploring monetization opportunities outside of virtual gifting. Together with a series of promotional activities, these initiatives partially offset the negative impact of the MAU decline caused by our shift in content procurement policies. We have been upgrading our platform-wide membership service, and this past quarter introduced game-specific memberships as well. By integrating game features and gamers' needs into a viable service package, our membership services attract new traffic and motivated inactive users to revisit our platform. Turning to our content updates.

In the third quarter, saw us further augment a variety of content offerings, including integrated live streaming, videos, graphic content, and community discussions. We brought together popular streamers, game developers, and distributors to organize custom tournaments and shows based on the unique features of individual games. This content offered opportunities for enhanced interaction between users and streamers. We see this and other initiatives as part of our long-term growth strategy to create a comprehensive game-centric content ecosystem. We endeavor to create a vibrant and healthy gaming community for our users by consistently providing high-quality content and innovative product offerings. Based on huge user base of games and esports, as well as their diverse content needs, we fully enrich our content offerings. We produced almost 90 esports tournaments this quarter.

Drawing upon our experience in organizing professional tournaments, we integrated features typical of pro events into our amateur offerings, leveraging our pro-style competition matching them, and inviting official commentators to host the events. We provided our users with a genuine tournament experience, featuring games including Honor of Kings and CS:GO. As the engagement of girls and women in the gaming community increases, we also produced a series of tournaments exclusive to female users. These tournaments featured the games CS:GO, CROSSFIRE, and NARAKA: BLADEPOINT, and combined with our streamer recruitment and training system, provided our female users with increased exposure and opportunities. Overall, these tournaments both expanded our user base and increased engagement levels in their respective game segments. We also put in the effort to add entertainment value to our professional competitive gaming content, making it more accessible to a wider audience.

For instance, we held tournaments in the LOL gaming segment in partnership with top streamers. Serving as team anchors, these top streamers invited professional esports players and other skilled gamers to team up and compete in live streaming sessions, which garnered widespread acclaim and attention. This type of content featuring pro gamers in entertainment-oriented team play enhances community resonance and engagement in its gaming segment, attracting new users and re-engaging inactive users. Let's now turn to copyrighted content. Drawing on our years of rich experience in live streaming official tournaments, we launched diversified promotional activities across a variety of content formats. These formats include live streaming, videos, and graphics related to official game and tournament IP content. At the same time, we explored new models for cooperating with game developers, so as to enhance tournament user stickiness and user engagement.

For instance, during the KPL summer tournament, we collaborated with Honor of Kings game developers to provide membership services exclusively for KPL tournament viewers. Leveraging the partial game data sharing partnership we established in the previous quarter. Incorporating the game feature of KPL, this service was well-received and contributed to new user growth. In addition to these innovations, we continue to improve ROI for copyrighted content, thanks to our initiative to manage operating costs, such as by utilizing game developers' resources and conducting joint operations. Now, turning to monetization. Our total paying user count in the third quarter was 5.6 million, with an average quarterly ARPU of RMB 319. As we maintained our efforts to promote rational consumption, we dynamically modified and fine-tuned our platform's tipping functions and operations, including canceling low ROI promotional activities for new paying users.

As a result of these changes, our paying user count declined. Our overall revenue remained stable on a quarterly basis, demonstrating the high stickiness of our core paying users with more rational and sustainable spending behaviors. More importantly, starting in the second quarter, we made structural adjustments to improve our revenue quality. We enhanced the quality of virtual gifting revenue and made progress in improving our non-virtual gifting revenue. First, we have been updating our platform-wide membership services since its major upgrade at the beginning of this year. During the quarter, we upgraded our member privilege system, where members are entitled to extra benefits upon the completion of certain activities on the platform, and can enjoy their membership anniversary display in streamers' live streaming channels. The service fully enhances the interactive experience between streamers and platform members.

We have seen encouraging improvements in our membership fee renewal rate, with the high user stickiness of our loyal fans demonstrating the value added by the service. At the same time, we further explored the potential of new monetization models and achieved meaningful progress in the development of collaborations with game developers. During the quarter, we began launching our innovative game-specific membership service. Users who purchase game-specific memberships on our platform receive basis points, and then they can earn extra points by completing assigned tasks on our platform. Users can exchange accumulated points for in-game items or rewards provided by our platform in select live streaming channels. These promotional activities, which are based on game's unique features, fulfill gamers' demands while enhancing user stickiness to our platform, reflecting the value of DouYu as a game-centric ecosystem platform.

Going forward, we will continue to further explore the needs of users based on different game features, and closely collaborate with game developers to discover and expand commercialization models and opportunities. In terms of product innovation and development, we continued to improve our users' viewing experience and foster a game-centric community. During the quarter, we collaborated with Tencent Cloud to create a VR stadium where users can watch e-sports tournaments. Upon entering the VR stadium through our platform tournament live streaming channel, users can enjoy a variety of interactive features, including viewing games in regular and VR modes, the ability to cheer for and support the participating teams, and special effect gifting. We implemented this feature during the live stream of CS:GO EPL. Users showed great enthusiasm in participating.

We will continue to refine and upgrade our virtual game viewing experience, further enhancing our users' live streaming experience and creating new and unique forms of engagement within our user community. Overall, we continue to execute our sustainable development strategy by investing in self-produced content and further innovating our operations. We also remained our deep collaborations with game developers and our commitment to build a healthy and engaging game-centric ecosystem supported by interactive content offerings. The combination of these efforts will ensure the stable development of our traditional business. At the same time, we remain committed to improving our financial performance by actively exploring new monetization models to improve our revenue structure while maintaining the stability of our current revenue streams. We will continue to improve our overall operating efficiency through cost controls and expense optimization, realizing our platform's potential for long-term 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 and Director)

Thank you, Lingling. Hello, everyone. In the third quarter, we maintained the stable financial performance of our core live streaming business while continuing to execute effective cost and expense controls. As a result, we generated an adjusted net profit for the second consecutive quarter. On top of this, we have been investing in new forms of premier content and exploring new monetization channels. We believe that our healthy financial status will enable us to ride out the changing market environment with more flexibility in our operations. Let's now look at our financial performance in more detail. Total net revenues in the third quarter of 2022 decreased by 23.4% year-over-year to RMB 1.8 billion.

Live streaming revenues were RMB 1.71 billion, a decrease of 22.9% from RMB 2.21 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 efforts prioritizing the healthy long-term development of our platform. As we seek a more balanced revenue structure, we focus on maintaining our core paying user base. In doing so, we intentionally canceled some promotional campaigns for new paying users starting this quarter, as this provided a low ROI. As a result of the decreased number of paying users, our quarterly ARPU was RMB 319, a 3.9% increase from RMB 307 in the same period last year.

Advertising and other revenues were RMB 93.3 million, compared with RMB 137.5 million in the same period of 2021. The year-over-year decrease was primarily attributable to the continued exploration of new commercialization models, which use a portion of advertising traffic that could otherwise have been directly monetized, as well as the soft demand for brand advertising under the weak macroeconomy. The decrease was partially offset by the increase in other revenues contributed by game-specific membership services. Cost of revenues in the third quarter of 2022 was RMB 1.55 billion. A decrease of 25.2% compared with RMB 2.07 billion in the same period of 2021.

Revenue sharing fees and content costs decreased 28.3% to RMB 1.32 billion from RMB 1.84 billion in the same period of 2021, which was driven by two factors. First, the decrease in revenue sharing fees outpaced the decrease in live streaming revenues as a result of lower revenue sharing ratio. This demonstrated our ongoing improvements to efficiency as we continue to execute our prudent operating strategies. Second, copyright costs decreased significantly as a result of our selective copyright procurement strategy, whereby we ceased acquiring overpriced copyrighted content for esports tournaments. Bandwidth costs in the third quarter of 2022 decreased by 17.4% to RMB 135 million from RMB 163.4 million in the same period of 2021.

The decrease was mainly due to higher bandwidth efficiency achieved through dynamic bandwidth allocation. The year-over-year reduction in peak bandwidth usage also contributed to the decrease in bandwidth costs. Gross profit in the third quarter of 2022 was RMB 251.2 million, compared with RMB 278.5 million in the same period of 2021. Gross margin for the quarter expanded to 14% from 11.9% in the third quarter of 2021, primarily due to two factors. The first was the significant decrease in the copyright costs as a percentage of revenues as we ceased acquiring overpriced copyrighted content for esports tournaments. The second was our lower revenue sharing ratio, which benefited from the improvement in revenue quality and our sustainable operating strategy.

Sales and marketing expenses in the third quarter of 2022 were RMB 162.1 million, a significant decrease of 25.9% from RMB 218.9 million in the same period of 2021. This was mainly attributable to the decreases in both marketing expenses for user acquisition and branding expenses. Research and development expenses in the third quarter of 2022 were RMB 84.4 million, representing a 31.5% decrease from RMB 123.2 million in the same period of 2021. This decrease was primarily due to a decrease in personnel-related expenses. General and administrative expenses in the third quarter of 2022 were RMB 52.3 million, dropping by 39.5% from RMB 86.5 million in the same period of 2021.

The decrease was primarily due to decreased share-based compensation expenses as a vast majority of shares and our share incentive plans were fully vested, as well as decreased professional service fees. Adjusted operating loss in the third quarter of 2022, which expect share-based compensation expenses, was RMB 8.4 million, compared with adjusted loss from operations of RMB 91 million in the same period of 2021. Net loss in the third quarter of 2022 was RMB 6.6 million, compared with RMB 143.5 million in the same period of 2021. The improved gross margin and expense controls combined have led to three consecutive quarters of narrowing losses.

Adjusted net income in the third quarter of 2022, which excludes share-based compensation expenses, share of loss in equity method investments, and impairment loss of investments was RMB 25.7 million, compared with adjusted net loss of RMB 72.7 million in the same period of 2021. For the third quarter of 2022, basic and diluted net loss per ADS were RMB 0.01 and RMB 0.01 respectively. While adjusted basic and diluted net income per ADS were RMB 0.09 and RMB 0.09 respectively. As of September 30, 2022, the company had cash and cash equivalents, restricted cash, short-term and long-term bank deposits of RMB 6.87 billion, compared with RMB 6.64 billion as of December 31, 2021. Going forward.

Shaojie Chen (Founder and Co-CEO)

We will continue to focus on optimizing costs and improving revenue quality in order to deliver sustainable profitability. We will continue to improve our overall ROIs and enhance monetization capabilities to support the long-term development of our platform. This concludes our prepared remarks for the day. Operator, we are now ready to take questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Lei Zhang of Bank of America. Please go ahead.

Lei Zhang (Analyst)

hi 冠 逸 ， 晚 上 好 。 谢 谢 接 受 我 的 提 问 。 我 有 2 个 问 题 ， 1st 可 能 是 战 略 层 面 的 ， 因 为 看 到 年 初 以 来 我 们 也 在 一 些 运 营 呀 和 这 个 版 权 采 购 方 面 做 了 一 些 调 整 ， 而 且 盈 利 能 力 也 有 所 提 升 ， 所 以 想 请 公 司 分 享 一 下 我 们 目 前 的 一 个 发 展 的 重 点 ， 还 要 怎 么 看 我 们 明 年 或 者 是 未 来 的 一 个 长 期 的 发 展 规 划 呢 ？

2nd 个 问 题 就 是 想 问 一 下 用 户 端 ， 因 为 从 Q1 开 始 的 话 ， Q2 跟 Q3 这 2 个 季 度 移 动 端 的 MAU 基 本 上 都 是 有 一 个 Q on Q 的 一 个 小 幅 增 长 。 所 以 想 问 一 下 ， 在 整 体 可 能 游 戏 跟 监 管 的 大 环 境 比 较 weak 的 情 况 下 ， 我 们 的 这 个 小 幅 增 长 的 主 要 的 驱 动 因 素 有 哪 些 ， 还 要 怎 样 看 我 们 一 个 未 来 的 MAU 的 一 个 发 展 的 预 期 呢 ？ 谢 谢 。 我 自 己 翻 译 一 下 。thanks management for taking my question.

My first question is strategic. Li, we noticed that we made some business adjustments and changed our content plan this year, which were the market improvements. Can you share with us your current strategic focus and our business plan for the next year? Secondly, notice that we have a Q on Q improvement in past two quarters in mobile MAU. What are the drivers for this? How should we look at our MAU trend going forward? Thank you.

Shaojie Chen (Founder and Co-CEO)

呃 ， 这 样 我 ， 我 来 回 答 这 两 个 问 题 。 然 后 从 ， 呃 ， 从 两 年 前 公 司 ， 呃 ， 进 行 了 这 个 战 略 升 级 之 后 ， 然 后 斗 鱼 呢 ， 其 实 一 直 在 坚 持 着 以 游 戏 为 核 心 的 多 元 化 的 这 个 内 容 生 态 发 展 的 战 略 ， 然 后 搭 建 了 现 在 目 前 的 这 个 游 戏 的 内 容 体 系 ， 然 后 现 在 开 始 重 视 精 细 化 的 运 营 和 一 些 创 新 服 务 ， 然 后 积 极 ， 然 后 构 ， 构 建 健 康 的 游 戏 内 容 生 态 。

嗯 ， 我 们 ， 我 们 在 过 往 的 这 个 ， 过 ， 过 往 季 报 里 面 也 有 持 续 的 这 个 交 流 ， 就 提 ， 其 中 提 到 了 我 们 在 坚 持 和 推 进 ， 呃 ， 公 司 长 期 的 这 样 一 个 发 展 的 一 个 同 时 ， 也 在 面 对 这 个 现 在 目 前 比 较 复 杂 的 这 个 宏 观 环 境 ， 我 们 会 基 于 ， 呃 ， 目 前 会 基 于 公 司 对 外 部 环 境 的 一 个 预 期 ， 然 后 进 行 一 些 短 期 的 这 个 运 营 策 略 和 战 略 上 进 行 一 些 灵 活 调 整 。

然 后 从 ， 从 去 年 开 始 ， 然 后 随 着 这 个 宏 观 环 境 的 一 些 变 化 ， 然 后 整 个 互 联 网 其 实 一 直 处 在 一 个 非 常 复 杂 多 变 的 这 个 态 势 里 面 ， 在 这 种 情 况 下 ， 我 们 采 取 了 这 个 稳 健 ， 更 加 稳 健 的 这 个 运 营 策 略 ， 一 方 面 是 积 极 主 动 地 提 ， 呃 ， 调 整 运 营 ， 呃 ， 这 个 运 营 策 略 ， 然 后 采 取 了 ， 呃 ， 比 较 审 ， 审 ， 审 ， 审 慎 的 这 个 运 营 机 制 。

另 一 方 面 ， 我 们 也 是 ， 呃 ， 停 ， 主 动 停 止 了 购 买 采 购 价 格 高 的 一 些 赛 道 版 权 ， 然 后 优 化 目 前 的 这 个 成 ， 成 本 结 构 ， 以 以 此 保 证 公 司 的 一 个 业 务 和 财 务 的 这 个 平 稳 。

Speaker 9

Since updating our strategy two years ago, we have consistently executed towards the development of a game-centric comprehensive content system. As we have communicated in the past earnings calls, this includes building an integrated content system, refining our operations, and innovating services while cultivating a healthy, positive game-focused content ecosystem. In the light of current economic complexities, we have adjusted our short-term operational focus. Internet companies has been operating in an ever-changing and highly complex external environment since last year. As such, we have adopted a more sustainable operating strategy, proactively ceased acquiring overpriced copyrighted content, and optimized our cost structure to ensure operational and financial stability for our business.

Shaojie Chen (Founder and Co-CEO)

从 目 前 这 个 公 司 的 运 营 状 况 来 看 ， 我 们 的 运 营 策 略 调 整 也 取 得 了 一 些 这 个 成 绩 。 我 们 一 方 面 在 缺 乏 优 质 赛 事 的 这 个 版 权 的 情 况 下 ， 通 过 持 续 的 这 个 其 他 内 容 投 入 和 服 务 创 新 ， 然 后 稳 定 住 了 目 前 的 用 户 规 模 ， 然 后 实 现 了 连 续 2个季度 移 动 端 的 MAU 增 长 。

另 一 方 面 ， 我 们 也 通 过 减 少 运 营 活 动 ， 提 升 收 入 质 量 ， 加 强 成 本 控 制 ， 然 后 公 司 连 续 2个季度 实 现 了 调 整 后 的 这 个 净 利 润 。

Speaker 9

So far, this adjustment has delivered positive results. We grew our mobile MAUs for two consecutive quarters through continued investment in self-produced content and innovative services without relying on traffic from overpriced premium tournaments. We also managed to achieve positive adjusted net income for two consecutive quarters by streamlining our operations, improving revenue quality, and implementing stringent cost controls.

Shaojie Chen (Founder and Co-CEO)

此 外 ， 我 们 在 这 个 内 容 管 理 方 面 也 进 行 了 一 些 这 个 精 细 化 。 我 们 目 前 是 的 方 式 是 从 每 一 个 游 戏 的 分 区 投 入 产 出 比 的 角 度 ， 合 理 动 态 地 去 调 整 ， 分 配 和 利 用 目 前 公 司 的 资 源 ， 这 个 动 态 评 估 我 们 目 前 的 运 营 策 略 。

以 Game for Peace 这 个 分 区 的 作 为 一 个 例 子 ， 然 后 基 于 目 前 这 个 分 区 ， 之 前 我 们 在 ROI 较 低 的 这 个 情 况 下 ， 然 后 我 们 年 初 的 时 候 并 没 有 采 购 这 个 职 业 版 权 PEL 的 这 个 版 权 ， 然 后 随 着 我 们 这 个 精 细 化 运 营 和 一 些 广 告 ， 和 一 些 厂 商 合 作 的 不 断 深 化 ， 然 后 分 区 的 ROI 有 所 提 升 之 后 ， 我 们 适 时 的 时 候 选 择 了 继 续 购 买 下 ，PEL 下 季 赛 的 版 权 ， 通 过 赛 事 内 容 的

回 归 吸 引 年 初 的 一 些 这 个 赛 事 流 量 的 这 个 提 升 和 回 归 。

Speaker 9

We also refined our internal management practices. We adjusted our allocation of resources by dynamically evaluating and altering our operating strategies based on the ROI of each game. In the Peacekeeper segment, for example, our decision not to purchase the copyright of the Peacekeeper Elite League Spring Tournament early this year was based on the relatively low ROI performance of this segment.

Shaojie Chen (Founder and Co-CEO)

未 来

Speaker 9

As we refine our operations and deepen our cooperation with game developers, ROI improved, and we concluded that the timing was right to purchase the copyright of the Peacekeeper Elite League Summer Tournament. This allow us to regain the traffic from the tournament content while maintaining our operational prudence.

Shaojie Chen (Founder and Co-CEO)

未来 这一 块， 我们 将 基于 对 游戏 行业 的 这个 多年 的 这个 运营 经验 和 深入 了解， 以及 目前 领先 的 这种 主播 资源 的 优势， 我们 将 持续 扩大 与 游戏 厂商 之间 的 合作， 然后 围绕 着 游戏 这一 块， 加强 自制 内容 的 投入， 活动 运营 和 社区 建设， 保障 平台 目前 的 这个 游戏 运营 的 内容 的 优势， 然后 逐渐 打造 一个 积极， 更加 积极 健康 的 平台 生态， 来 保持 流量 稳定。 我们 将 对 于 更 多 的 商 业 模 式 进 行 探 索， 逐 步 改 善 收 入 的 质 量， 同时 逐渐 控制 成本 和 费用 的 转 化 率， 以 提 升 整 体 的 效 率， 从 而 实 现 这 个 平 台 的 这 个 长 期 的 健 康 发 展。

Speaker 9

We have a deep understanding of the gaming industry, years of operating experience, and leading stream resources. Leveraging these advantages, we will continue to develop and strengthen our collaborations with game developers and invest in more in game-centric, self-produced content, operating activities, as well as community building. At the same time, we will remain our advantages in high-quality content and game operations, and stabilize platform traffic by promoting our healthy and positive game ecosystem. Going forward, we will continue to explore new business models, gradually improve revenue quality, and boost operating efficiency through effective cost controls and expense optimization. By doing so, we will realize our platform potential for long-term and sustainable growth.

Shaojie Chen (Founder and Co-CEO)

呃 ， 刚 才 提 到 这 个 第 二 个 问 题 呢 ， 我 们 ， 嗯 ， 就 是 刚 才 我 们 持 续 大 家 沟 通 的 ， 然 后 ， 呃 ， 斗 鱼 ， 斗 鱼 目 前 也 是 一 个 以 游 戏 为 核 心 的 这 样 一 个 内 容 平 台 ， 然 后 我 们 ， 我 们 一 直 长 久 来 是 提 供 优 - 优 质 的 这 个 内 容 ， 以 及 ， 呃 ， 为 游 - 游 戏 用 户 提 供 内 容 来 ， 来 吸 收 和 留 存 用 户 。

我 们 将 我 们 这 边 ， 呃 ， 的 之 前 的 选 择 ， 选 择 ， 目 前 实 行 选 择 性 的 赛 事 ， 呃 ， 采 购 政 策 ， 然 后 放 弃 了 采 购 部 分 价 格 过 高 的 游 戏 版 权 之 后 ， 呃 ， 损 失 了 一 部 分 主 要 ， 主 要 观 看 赛 事 的 用 户 ， 这 也 是 在 我 们 的 预 期 之 内 。 因 此 ， 嗯 ， 因 此 呢 ， 我 们 提 前 做 了 很 多 稳 定 流 量 的 措 施 和 工 作 ， 例 如 增 加 自 制 内 ， 自 制 内 容 的 投 - 投 入 和 加 强 与 厂 商 合 作 的 运 营 。

通 过 优 质 的 自 制 内 容 的 创 新 运 营 ， 保 持 了 MAU 整 体 的 稳 定 。 啊 ， 展 开 说 在 内 容 方 面 ， 我 们 基 于 现 有 的 主 播 资 源 和 用 户 需 求 ， 不 断 地 细 化 了 这 个 内 容 的 供 给 ， 满 足 了 多 ， 用 户 多 元 化 的 内 容 消 费 。

嗯 ， 其 他 在 运 营 方 面 ， 我 们 也 不 断 地 深 化 与 游 戏 厂 商 的 合 作 ， 通 过 联 运 ， 呃 ， 运 营 ， 然 后 符 合 法 律 法 规 的 数 据 互 通 和 商 业 化 的 创 新 ， 来 满 足 对 用 户 的 使 用 需 求 和 消 费 需 求 。 嗯 ， 目 前 得 益 于 我 们 用 户 规 模 ， 得 益 于 此 ， 我 们 的 用 户 规 模 连 续 两 个 月 ， 呃 ， 两 个 季 度 实 现 了 平 稳 的 这 个 增 长 。

Speaker 9

As we have communicated before, DouYu is a game-centric platform which attracts and retains users by providing high quality, game-centric content. When we introduced our selective copyright procurement strategy, we expected to lose some users. The lack of some overpriced copyrighted tournaments means that users who primarily use our platform to watch official tournaments will have less incentive to engage. Recognizing this, we implemented several strategies to stabilize traffic and maintain our overall MAUs, fostering the creation of high quality self-produced content and innovating our operational strategy. This included increasing our investment in self-produced content and deepening our collaborations and operations with game developers. We expanded our content offerings based on the analysis of streamers and of users demands in order to meet the diverse content consumption needs of our users.

In terms of operations, we further emphasized our collaboration with game developers and deliver our users the kinds of content and services they wish to see and pay for. We achieve this by conducting joint operations with developers, sharing game data in compliance with laws and regulations, and designing innovative strategies for commercialization. As a result, our user count has grown steadily for two consecutive quarters. Let's take a closer look at typical gaming segments. In the LOL segment, we lost some users who mainly watched official tournaments on our platform as we did not purchase the copyright of LPL. The traffic of non-copyrighted content has remained stable, and user interactions improved sequentially. This was driven by the quality of our premium self-produced content, as well as innovative operations.

In certain gaming segments, we introduced new game-specific membership services based on each game's features and our users' needs. These measures not only attracting new users, but also drove the recovery of those segments' traffic, and greatly improved user engagement. Following three quarters of operational adjustments, we have built a healthy and interactive community on our platform, and have stabilized our user base, thanks to our premium stream of resources and self-produced content. Going forward, we will continue to enhance the engagement of our core users, attract more users, and cultivate our gaming-centric ecosystem. Nevertheless, we cannot ignore the impact of large-scale tournaments on traffic. In the fourth quarter, we will try our best to keep overall traffic stable without the copyright of the LOL World Championship. Thank you. Operator, next question please.

Lingling Kong (Director of Investor Relations)

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

Thomas Chong (Regional Head of Internet and Media)

Thanks management for taking my questions. Just now, management talks about content and operations are crucial in maintaining traffic, which is a very key reason for the stability in terms of the traffic sources. I just want to get some more color from the management perspective, in terms of the progress and our plans in content, and operations side. Thank you.

Shaojie Chen (Founder and Co-CEO)

Thank you for your question. Our gaming content is generated from streamers' content and our collaboration with the game developers, which is gradually developed for better quality based on user feedback. As our high-quality content attracts more users, more streamers are drawn to our platform and leverage content load forms. High-quality content is the core of our operations. As such, we continue to upgrade our gaming content to meet the evolving demands of users, and to create a healthy gaming ecosystem through high-quality content and operational refinement. On top of having live streaming as our main form of content, we have added videos and community poster content to diversify and enrich our multifaceted content system. We have also further enhanced and refined the operation of our existing gaming content to stabilize our core user base.

At the same time, we extended our game genre coverage in order to satisfy the demand of long-tail users and expand our overall user base. We continue to improve the quality of our self-produced content and keep investing in professional tournament producers in-house. For classic games, such as Honor of Kings and LOL Teamfight Tactics, we successfully launched the signature self-producer professional tournaments. We were supported and acknowledged by each game's developers, and were well received by hardcore gamers. Meanwhile, we continued our efforts producing a major tournament. Our content and production initiatives this quarter were concentrated on the enhancement of interactions between streamers and users. Based on precise content recommendation, we provide users with content relevant to their interests, and users were more effectively directed to continue to enjoy. This improved users of our experience and resulted in increased user stickiness.

Based on the strong performance of our top streamer tournament in LOL gaming segment, we subsequently produced similar content in the Honor of Kings segment in October, and also received great reception from our users. In terms of operations, we continued to deepen our collaborations with gaming developers. These collaborations have evolved from simple game launch promotions and basic cooperation into a close strategy where we work with game developers throughout the entire game operation cycle. We assist the developers by supplying content and planning events, and we have now begun to explore commercialization opportunities in more games. For instance, we collaborated with Dota 2 and Honor of Kings to share partial game data in compliance with laws and regulations, providing a better viewing experience for our users. This was a crucial step in the development of our in-depth collaboration strategy.

Leveraging that sharing, we launched a membership service in Honor of Kings segment to enrich the value-added service on our platform. Besides the Honor of Kings segment, we also launched game-specific membership in other suitable game segments based on both game's unique features and user's demand. By providing value-added services other than gaming content, we further enhanced user stickiness to our platform. Going forward, we are dedicated to creating a more interactive game ecosystem on top of our existing content system. Our goal is to provide users with a better experience on our platform in regards to gaming content, gaming experience, and gaming demand. Thank you. Please, next question.

Raphael Chen (MD and Senior Analyst)

The next question comes from Raphael Chen of BOCI. Please go ahead.

I will translate myself. Thanks for taking my question. My question is regarding the quarterly paying users. We noticed that this quarter experienced a quarter-over-quarter decline. Could management share more color on the underlying reasons? Can management comment on the paying user trends going forward and main contributors? Thank you.

Shaojie Chen (Founder and Co-CEO)

As we briefly explained in our prepared remarks, the change in paying user count was due to our decision to cancel low ROI promotional activities for new paying users. This decision was consistent with our operating strategy of lowering costs and increasing operating efficiency. Based on analysis, the ROI of our promotional activities for new users tends to be relatively low. One-off promotion activities that don't have follow-up ongoing streamer and user interactions are less effective at converting new paying users into regular paying users.

As such, we started to better manage our paying user groups in order to improve revenue quality. We have gradually reduced poor ROI promotional activities and started to focus on improving the overall quality of paying users. We are developing and improving our revenue streams in two ways. First, we focus on maintaining core paying users to stabilize our core business. For example, streamers fans have always been our high quality paying user base. In addition to utilizing our effectively commercialized platform-wide membership and game-specific memberships, we also launched the non-monetized Fans Town feature. This is a space where fans record their growth paths along with streamers. Activities in the feature were designed to be completed over a long period of regular participation, promoting frequent fans, streamers interactions, and gradually cultivating paying habits among fans.

Second, we are focused on developing new business model other than the traditional tipping business model. We upgraded our platform-wide membership service to provide value-added services based on streamers characteristics and games unique features. The service is developing well and has already improved our revenue mix. We also worked to identify further opportunities for monetization and launched game-specific memberships across several gaming segments. Looking ahead, we will continue to leverage our competitive advantage of our in-depth game, in-depth gaming-centric ecosystem to explore the potential of new and innovative business models. Thank you very much.

Lingling Kong (Director of Investor Relations)

The next question comes from Ritchie Sun of HSBC. Please go ahead.

Ritchie Sun (Analyst)

Thank you management for taking my questions. Could you elaborate more on the platform wide as well as game specific membership services? What is our progress on that? Can you talk about monetization potential in the future? Thank you.

Shaojie Chen (Founder and Co-CEO)

Let me answer your question. As our membership service become an important component of our non-gaming monetization model, we are actively tailoring this membership to suit different user needs. Examples include our implementation of our platform wide membership and game specific game membership service. In line with our refined operating strategy, we plan to launch customized membership service based on user needs within different segments. Platform wide membership is an important tool to maintain interaction between our streamers and users. With a monthly subscription, members have more opportunities to interact with streamers in games and gain special access to unique value-added service. This increased engagement between members and streamers has lead to an increase in virtual gifting revenue.

We kept enhancing the interaction features and upgraded the members privilege system this quarter, leading to a significant increase in renewal rates and heightened to our platform. As a way to experiment with new strategies for monetization, we also launched game-specific membership based on the specific nature of in-game items and gamer needs. We are currently rolling out this service among top streamers in certain game segments, and have achieved good results through well-marked promotion so far. Streamers who promoted this service gained great exposure, and their channels traffic increased by 15%-30%. A significant number of game fans were attracted to participate in the new memberships. This strategy allows us to both attract new users and galvanize the retaining our inactive users, promoting a virtual secure content ecosystem in the gaming segment.

Going forward, we will continue to explore commercialization opportunities based on games' unique features, and launch more game-specific membership service in more gaming segments. By exploring gamers' in-game demands, we can provide our users with a richer gameplay experience to supplement their existing content consumption on our platform. At the same time, this new initiatives will also offer more diversified revenue channels to our streamers, and further promote our platform's gaming content ecosystem. Thank you. Please next question.

Lingling Kong (Director of Investor Relations)

The next question comes from Cathy Lai of Morgan Stanley. Please go ahead.

Cathy Lai (Analyst)

I'll translate myself. Thanks management for taking the question. Could you help us to understand a bit more about the drivers behind GP margin fluctuation in the quarter this year? How should we think about the future GP margin? Thank you.

Shaojie Chen (Founder and Co-CEO)

Thank you for the question. The slight quarter-over-quarter increase in cost of revenues was mainly due to three factors. First, we managed to stabilize revenue share ratio sequentially, thanks to our adoption of our long-term and steady development strategy for virtual gifting business. We also reduced those revenue streams with lower ROI while improving our revenue quality. We expect that our overall revenue share ratio will remain at the current healthy level with only slight fluctuation between quarters as we further adjust and fine-tune our revenue generating operations. Second, our content costs increased sequentially during the quarter. This was mainly due to increases in copyright and self-produced content costs, which were partially offset by a reduction in streamer payroll. In terms of copyright costs, we purchased copyright of Peacekeeper Elite League (PEL), resulting in a slight increase in copyright costs compared to the previous quarter.

Our self-produced content front, we continue to explore innovative content formats. During the quarter, we launched content updates for new versions of games and promoted our platform new initiatives leading to a sequential increase in content costs. We have also been continuously optimizing our streamer resources of overseas business, leading to a quarter-over-quarter decrease in streamer payroll. Looking forward, we will prudently evaluate our procurement decisions for large scale tournaments and optimize our streamer payroll structure. At the same time, we will continue to increase our investment in high quality self-produced content. In summary, we expect operating margin for 2022 to improve slightly on year-over-year basis. Thank you.

Lingling Kong (Director of Investor Relations)

Thank you. That's 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 team, thank you for joining our call. We look forward to speaking with everyone next quarter.

Operator (participant)

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