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Edited Transcript of DOYU.OQ earnings conference call or presentation 13-Aug-19 12:00pm GMT

Q2 2019 Douyu International Holdings Ltd Earnings Call

Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Douyu International Holdings Ltd earnings conference call or presentation Tuesday, August 13, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mao Mao

DouYu International Holdings Limited - IR Director

* Shaojie Chen

DouYu International Holdings Limited - Founder, CEO & Director

* Hao Cao

DouYu International Holdings Limited - VP of Finance & Director

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Conference Call Participants

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* Li Jiang

BofA Merrill Lynch - Analyst

* Daniel Chen

JPMorgan - Analyst

* Hillman Chan

Citigroup - Analyst

* Alex Poon

Morgan Stanley - Analyst

* Ken Jeong

Jefferies LLC - Analyst

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Presentation

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Operator [1]

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Good morning and good evening, ladies and gentlemen. Thank you. And welcome to the DouYu International Holdings Limited second-quarter 2019 earnings conference call. (Operator Instructions). I will now turn the call over to the first speaker today, Ms. Mao Mao, IR Director of DouYu. Please go ahead ma'am.

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Mao Mao, DouYu International Holdings Limited - IR Director [2]

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Hello, everyone. Welcome to our second-quarter 2019 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 of 2019 financial results on our IR website at IR. DouYu.com. You can also check a replay of this call when it becomes available in a few hours on our IR website.

Before we start, please note that this call may contain forward-looking statements made pursuant to the Safe Harbor 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 unknown and known 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 turn the call over to our Chairman and Chief Executive Officer, Mr. Shaojie Chen. Please go ahead, sir.

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Shaojie Chen, DouYu International Holdings Limited - Founder, CEO & Director [3]

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(Interpreted). Hello, everyone. Welcome to our second-quarter 2019 earnings conference call. Also our very first earnings call as a public company. We are pleased with our robust growth trajectory during the quarter as our total revenue increased by 133.2% year-over-year to RMB1.87 billion.

Our gross profit increased by 823.8% year-over-year to RMB301 million with gross margin expanding to 16.1%. Our adjusted net income reached RMB52.6 million with an adjusted net margin of 2.8%. The average total MAUs in the quarter increased by 32.6% year-over-year to RMB162.8 million while the average mobile MAUs increased by 42.5% year-over-year to RMB50.6 million.

Our quarterly paying users reached 6.7 million, implying a year-over-year growth of 123.2%. In the second quarter we were able to expand our user base substantially driven by user growth on both mobile and PC. The rapid mobile MAU growth in the second quarter was driven by our continuous efforts to upgrade our product functionality and user interface such as the instant turn on feature which enhances user experience on our mobile app.

As the user bandwidth cost of 4G networks gradually declined we saw the number of users watching streaming content through 4G explode. The average mobile MAU who visited our app through a 4G network increased by 39% year-over-year. With the increasing popularity of 4G and the coming launch of 5G networks, we are confident that our mobile MAUs will continue to grow at a fast pace and become one of the key drivers for user growth.

At the same time our PC user base maintained its steady growth trajectory. During the second quarter our average PC MAUs increased by 28.5% year-over-year to 112.2 million, mainly driven by the improving penetration and rising popularity of eSport games such as [CNF], CS:GO and CFT. These type of eSport games tend to attract hard-core gamers who are extremely loyal live streaming viewers and contribute high lifecycle user value.

In addition, the gradual resumption of regulatory approval for game licenses has led to the introduction of new games onto the market and the associated user growth. As the eSports industry evolves and consolidates continuously, our market leadership has enabled us to attract an increasing number of high-quality streamers to our platform, thus further enhancing our content and accelerating our user attraction capabilities.

Also as we launch more diversified product functionality and improve the social features of our online community, our user engagement is perpetually on the rise. In the second quarter the total viewing time of our active users achieved 2.5 billion hours, representing a year-over-year increase of 56%.

As we continue to convert eSports gamers into game live streaming viewers we are confident that we will be able to attract more and more users and qualify our leadership position as the largest game centric live streaming platform in China.

During the second quarter we further enhanced content throughout our game centric live streaming ecosystem to improve user stickiness. Game live streaming contributed more than 80% of total viewership and approximately 50% of revenue from live streaming for this quarter.

Our game centric premium content is effectively supplemented by pay entertainment and talent shows, enabling us to build up a comprehensive content creation system while achieving better user outreach and diversified monetization.

As we continue to invest in eSports to capture its growth and monetization potential, we self-organized and live streamed 38 eSports tournaments and broadcasted 76 additional high-quality eSport tournaments during the second quarter. Our [Golden Grants] tournament, for example, attracted 17.7 million viewers in the first half of the year.

During the 2019 DouYu Carnival in June we broadcasted [33] eSports competitions and attracted over 310 million online viewers. To complement our direct investment in eSport content, we sponsored a number of top eSport teams including [iG] team who won the world championship of LOL Season 8 and [eStar] team who won the [PPL] spring 2019 championship.

We also explore cooperative initiatives with TenCent in several eSport tournaments such as the interactive audience cheering system for [KPL]. Going forward we plan to expand and deepen our eSport [support] through eSport team sponsorship and the eSport tournament organization to ensure a consistent supply of high-quality content, grow our user base and discover new monetization opportunities.

For streamers we continue to refine our exclusive contract model to work directly with our top streamers, which contributed significantly to premium content production and user attraction. At the same time we utilized our talent agency model to engage and manage long-tail streamers efficiently. We believe that those two models combined are critical to streamer diversification and monetization.

We view premium game content as our key competitive advantage. Looking forward we are committed to building out our game centric content production system, fine-tuning our operation within each segment, and improving our streamer development mechanism. In addition, through our precise identification of new (inaudible) games, we should be able to enhance our user conversion and deepen our market penetration.

During the second quarter we continued to see further improvement in monetization. Our quarterly paying users increased by 123.3% year-over-year to RMB6.7 million with a pay ratio of 4.1% and a quarterly ARPPU increase of 14.3% year-over-year to RMB256. We are currently deploying different monetization strategies in different segments.

For game live streaming we increased our users' willingness to pay through small amount gifting and our [fence] system. Once a user bought his or her first (inaudible) card, we successfully transformed that users' consumption habit and converted a casual user into a paying user. Moreover, we perpetuated his or her consumption through to peer (inaudible) experience by continuous product upgrades and social feature enhancements.

Looking forward, we believe that game live streaming has a huge monetization potential. In addition to game live streaming, we continue to enrich our premium membership system in the pay entertainment and talent show segments to better cater to user's needs. By strengthening our cooperation with [talent] agencies we further improved our monetization efficiency.

Also we worked closely with streamers and motivated them to take the initiative of promoting their user interaction and managing their live streaming rooms as self-sustaining independent platforms. For example, we provided our streamers with backend data support and a series of operational tools so that they could increase their user traffic by utilizing these data and tools. In this way we were able to improve our monetization efficiency across the entire platform.

In the second quarter we continued to develop our AI and big data capabilities to satisfy varied customer demands, increase user traffic, improve user stickiness, and enhance user monetization. For example, our AI video identification system can dynamically segment streamers to produce a precise match with user preferences. Users can also filter and select their desired content based on screen display information.

With the expected introduction of 5G technology we foresee a whole new slew of business opportunities emerging for the game centric live streaming industry. We are actively investing in technology and preparing for the new dawn of the 5G era.

In overseas expansion we have established a foothold in India as well as Southeast Asia including, for example, Vietnam and are actively exploring additional opportunities in Japan. While we pay close attention to overseas markets, we believe such opportunities are still at the early stage of their development. It will take time to educate overseas users and cultivate their playing habits. Therefore we should remain prudent in our assessment of investment opportunities in overseas markets.

To conclude, we accomplished better than expected financial and operational results during the second quarter. To maintain our market leadership as the largest game centric live streaming platform in China, we will continue to lay the foundation for each link in the game live streaming and eSports value chain while improving our operating efficiency and financial performance to create value for our shareholders in the long run.

With that I will turn the call to our Vice President of Finance, Mr. Hao Cao, to go through the details of our financial performance in the second quarter.

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Hao Cao, DouYu International Holdings Limited - VP of Finance & Director [4]

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Thank you, Shaoji. Hello, everyone. Please let me go through our second-quarter financial results. Due to our continuous efforts in growing our user base, enriching and improving the quality of content, cultivating users' paying habits, as well as broadening our brand awareness our total net revenues increased by 133.2% year-over-year to RMB1.87 billion in the second quarter. Improvements to both our paying user base and [ARP] drove our live streaming revenues to RMB1.71 billion in the second quarter of 2019, representing 156.0% year-over-year growth.

During the second quarter we continued to leverage our integrated promotion activities to reach a broader group of users with our in-house brand awareness. As a result our advertising and other revenues increased by 21.2% to RMB164.4 million in the second quarter of 2019 from RMB135.6 million in the prior year period.

Coinciding with our revenue growth and benefiting from our upgrades to technology, revenue share of fees and content cost as well as bandwidth costs increased at a slower pace relative to our revenue growth in the second quarter of 2019. During the quarter cost of revenues increased rapidly by 104.0% to RMB1.57 billion from RMB707.3 million in the prior year period.

Revenue sharing fees and content cost increased by 121.2% to RMB1.33 billion from RMB599.8 million in the prior year period, primarily due to the higher revenue sharing fees caused by increased live streaming revenues and our expanded content offerings, which we continue to bolster by investing in quality content production by the platform and content rights to [progress] broadcast eSports-related content.

Bandwidth cost increased by 15.2% to RMB153.3 million from RMB133 million in the prior year period, which was primarily due to the growth in our user base and increase in user engagement on our platform. As we continue to introduce more high-quality products and services onto our platform, our bandwidth cost will continue to rise in absolute terms in order to ensure a smooth life streaming experience.

Importantly, these increases to bandwidth costs will be partially offset by our improvements to bandwidth utilization efficiency attributable to the continued deployment of new technologies in content distribution.

In the second quarter of 2019 our gross profit increased by RMB823.8% to RMB301.1 million from RMB32.6 million in the prior year period. In addition, gross margin increased to 16.1% in the second quarter of 2019 from 4.1% in the prior year period.

Such gross margin improvements were primarily attributable to our continuous improvements in monetization capabilities, bandwidth utilizations through technology upgrades and operational efficiency. Operational efficiency improvements also contributed to the development of economies of scale on the platform which has helped to boost gross margin in turn.

Let's now take a look at operating expenses. Our sales and marketing expenses increased by 17.4% to RMB167.8 million in the second quarter of 2019 from RMB142.9 million in the prior year period, which was mainly attributable to the increase in greater assets in promoting our brand awareness, eSports content and off-line events.

Research and development expenses remained relatively stable at RMD84.4 million in the second quarter of 2019 compared with RMB82.9 million in the prior year period.

General and administrative expenses increased by 98.4% to RMB73.3 million in the second quarter of 2019 from RMB37 million in the prior year, which was mainly due to the increased share-based compensation expenses related to the awarding of restricted shares in connection of our acquisition for NonoLive in October 2018, as well as the increase in salaries and benefits of our management team as a result of our business expansion.

During the second quarter of 2019, both our sales and marketing expenses, as well as general and administrative expenses, as a percentage of our total net revenues exhibited a year-over-year decrease. These improvements were mainly due to our initiatives to strengthen operating leverage.

Other operating income net was RMB14.5 million in the second quarter of 2019 compared with RMB21.2 million in the prior year period. Our adjusted operating income for the first time turned to positive from an adjusted operating loss of RMB204.6 million in the prior year period to RMB17.4 million in the second quarter of 2019.

We achieved an adjusted net income of RMB52.6 million in the second quarter of 2019 in comparison to an adjusted net loss of RMB221.9 million in the same period of 2018. Please note that our adjusted net income excludes service compensation expenses, share of gain or loss in equity method investments, and impairment loss of investments.

For the second quarter of 2019 basic and diluted net income per (inaudible) share was RMB0.86 and RMB0.82 respectively compared with a basic and diluted net loss per ordinary share was RMB0.86 and RMB0.82, respectively, compared with a basic and diluted net loss per ordinary share of RMB28.07 and RMB28.07, respectively, in the prior year period.

For the second quarter of 2019 adjusted basic and diluted net income per ordinary share was RMB4.51 and RMB1.91, respectively, for the second quarter of 2019, compared with an adjusted basic and diluted net loss per ordinary share of RMB27.25 and RMB27.25, respectively, in the prior year period.

To accelerate our business organic growth we completed our initial public offering in July 2019 and received USD489.9 million in net proceeds after deducting underwriting discounts and commissions and estimated offering expenses payable. Our successful IPO on the NASDAQ is an important milestone for our Company to date and represents another crucial step for us on the path to building a truly dynamic and sustainable growth company.

Going forward we will continue on strengthening our value proposition in the game centric live streaming industry, as well as exploring both the upstream and downstream of eSports value chain. We will continue to drive our revenue growth through user base expansion, paying ratio enhancement and up improvements. We will also further optimize our operational efficiency and operating leverage to increase our margins. We aim to create long-term value to our shareholders.

Taking into account our growth plan and monetization capabilities, we expect our total net revenues for the third quarter of 2019 to be in the range of RMB1.95 billion to RMB2 billion. This forecast reflects our current and preliminary views on the market and operational conditions, which are subject to change. This concludes our prepared remarks for today. Operator, we are now ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Li Jiang, Bank of America Merrill Lynch.

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Li Jiang, BofA Merrill Lynch - Analyst [2]

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(Spoken in Chinese). I will translate myself. Congrats on a strong set of results. My question is mainly regarding game streaming industry. What's the management's view on the competition from (inaudible) players and (inaudible)? Do you see any impact to our business? And will this change the competitive landscape of the game streaming industry?

Secondly, how do you look at the user TAM of game streaming industry? Do you see the user growth of game streaming to slow down in the coming years? And what is our MAU expectation on both total MAU and mobile MAU for this year? Thank you.

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Shaojie Chen, DouYu International Holdings Limited - Founder, CEO & Director [3]

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(Interpreted). Regarding your question on [Quizsho], we believe the game [launching] market currently has enormous growth potential and we welcome Quizsho's presence in the market and we believe it will bring in the new users and -- mostly of which are penetrated in the lower tier cities. And we believe Quizsho's [patterns] in game live streaming might affect the industry competitive dynamic or landscape to some extent, but we don't take Quizsho as a direct compete for the following reasons.

From content and user quality perspective we are more focusing on creating high-quality game content, the majority of which are hard core eSport game content. And therefore we attract the most hard-core users in the game live streaming market with high quality and user stickiness.

And also, for example, our iOS users account for over 40% of mobile paying users and around 50% of our users are located in first and second tier cities. So these type of users have higher consumption capability and lifecycle value. So, we believe the user overlap between us and Quizsho is minimal.

So, regarding your second question on the TAM of the game live streaming space, we believe currently the live streaming business about conversion, which means to convert the gamers into live streaming viewers and users of our platform. So, it takes time for conversion to happen.

We expect the user conversion to be a long-term mission for us while the speed of this user conversion could be impacted by a number of short-term factors during the process. So, therefore we believe in the long run the game live streaming industry would maintain a steady growth trajectory and going forward future launch of blockbuster games will accelerate the conversion of the new gamers and continue to drive the strong growth trajectory of the industry.

So, if you asked me about the expectation of future user growth, I believe in near- to long-term it will still be a steady growth trajectory, but I can't really quantify it for now.

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Li Jiang, BofA Merrill Lynch - Analyst [4]

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Thank you so much, very useful.

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Operator [5]

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Daniel Chen, JPMorgan.

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Daniel Chen, JPMorgan - Analyst [6]

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(Spoken in Chinese). So I will translate myself. So first of all, congratulations on a very strong quarter. My question is related to the lucky draw feature on live broadcasting platforms. So, we know that -- I would say this is a function that's very common on live broadcasting platforms. And I think it could actually help to increase the user engagement.

But just wondering, is there a potential regulatory risk related to such a lucky draw feature? And meanwhile, we also noticed there are some other live broadcasting platforms that have regulated function recently. So just wondering, will DouYu follow such procedure? And if so, what's the revenue implication if we just suspend such a lucky draw feature on our platform? Thank you.

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Hao Cao, DouYu International Holdings Limited - VP of Finance & Director [7]

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(Interpreted). So, regarding your question on lucky draw, we believe lucky draw or the quiz feature was firstly launched by other live streaming platform in 2013 and has been existing in the industry for around six years. The reason why some platforms took their quiz kind of product off-line previously was because it was regarded with high regulatory risk. And after [ratification] the products got online again. So, we believe so far all the major live streaming platforms have similar quiz business.

So, before any of our products get on line we make sure that all of our products are fully compliant with the current regulatory requirements. So, our internal legal department do several runs of check before we get the product online. And we are also closely monitoring any regulatory updates from development authorities. And we keep a three-point communication with the Chinese regulatory bodies to make sure that we are complying with any recent regulatory requirements.

And moreover, the quiz products were designed to increase the user interaction instead of achieving monetization. So, through participating in quiz the connection between the [fence] and streamers becomes more close and it's really difficult for us to break down revenue contribution from quiz (inaudible).

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Operator [8]

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Hillman Chan, Citigroup.

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Hillman Chan, Citigroup - Analyst [9]

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(Spoken in Chinese). So, I have two questions. The first one is on the non-gaming content for the -- including talent shows and paid entertainment content. So, could management share more color on the growth strategy for the MAU, the paying ratio as well as the ARPPU perhaps in the context of upcoming features under development and also the cooperation with talent agencies?

And my second question is on our operation and content strategy. How are we differentiated from other competing platforms including Huya and Penguin eSport and so on? Thank you very much.

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Shaojie Chen, DouYu International Holdings Limited - Founder, CEO & Director [10]

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(Interpreted). Okay, regarding your first question on talent show and pay entertainment business, we are currently focusing on user base retention. So, for these two segments we already have a very sophisticated business model in place. And previously we were more following a (inaudible) model towards the game live streaming. But currently we are also cooperating with talent agencies to improve our monetization efficiency.

Regarding your second question on our differentiation with Huya, we believe both us and competitors are working on the game live streaming space, so we don't foresee very big gap in terms of content or positioning.

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Hillman Chan, Citigroup - Analyst [11]

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(Spoken in Chinese).

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Operator [12]

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Alex Poon, Morgan Stanley.

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Alex Poon, Morgan Stanley - Analyst [13]

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(Spoken in Chinese).

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Shaojie Chen, DouYu International Holdings Limited - Founder, CEO & Director [14]

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(Interpreted). The reason of a decline in revenue growth quarter-over-quarter is because of our better than expected first- and second-quarter results. Although the implied quarter-over-quarter revenue growth is not significant, we are still implying a 90% to 95% year-over-year growth which demonstrates that we are still growing our business at a very fast pace during this quarter.

So, we believe it takes time for our new users to cultivate their spending habits. In the first quarter we successfully increased our quarterly paying users from 4.2 million to 6 million. And in this quarter we managed to increase ARPPU from RMB226 to RMB256. So, both data show that our monetization methods are effective.

That being said, both paying ratio and ARPPU will have a stepped or stepwise growth trajectory instead of linear growth given it takes around one to two quarters to cultivate user spending habits. So, (inaudible) continuous optimization of our small amount gifting model through the [fence] system, we expect to see our monetization to generate more growth potential in the future.

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Alex Poon, Morgan Stanley - Analyst [15]

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(Spoken in Chinese).

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Operator [16]

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(Operator Instructions). [Ken Jeong], Jefferies.

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Ken Jeong, Jefferies LLC - Analyst [17]

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(Interpreted). I will translate myself. The first question is about the differences between the PC and mobile paying users. How does the monetization capabilities compare between these two channels? How would the revenue and paying user contribution be like in this quarter?

And my second question would be on overseas expansion. Do we have any particular (inaudible) towards the second half and do you have any MAU target for this? Thank you.

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Shaojie Chen, DouYu International Holdings Limited - Founder, CEO & Director [18]

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(Interpreted). Regarding your first question on the user behavior difference between mobile and PC and -- we are seeing more spending behavior to take place on mobile and also higher-paying ratio for mobile.

And regarding your second question, we are constantly evaluating investment opportunities in overseas markets including a potential collaboration with local parties. But for the near-term we expect it to not have a significant impact on our profitability.

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Ken Jeong, Jefferies LLC - Analyst [19]

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(Spoken in Chinese).

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Operator [20]

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Ladies and gentlemen, this will conclude our question-and-answer session. At this time I'd like to turn the conference back over to management for any closing remarks.

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Mao Mao, DouYu International Holdings Limited - IR Director [21]

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Thank you, operator. Thank you for joining our call today. We look forward to speaking with everyone next quarter. If you have any questions, please contact the IR team of DouYu. Thank you.

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Operator [22]

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Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation and you may now disconnect your lines.

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Editor [23]

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Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the Company sponsoring this Event.