DouYu International Q3: Exodus Of Subscribers Continues, But There Is Hope

seekingalpha11-23

DouYu International Holdings Limited's Q3 earnings reveal a significant decline in user base and ARPU, with live-streaming revenues dropping 34.7% to $107 million.Despite a 50% y/y growth in other ...

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Maskot/DigitalVision via Getty Images  Introduction DouYu International Holdings Limited (NASDAQ:DOYU) recently reported its Q3 earnings, which showed a continual hemorrhage of the user base and lower ARPU. The company’s other revenue segment saw decent growth, giving hope that the diversification efforts are well on their way. However, since live-streaming is still such a big revenue contributor, I want to see it being revived over the coming quarters before I would consider it an investment. The company is trading below its cash value, but that doesn’t mean much if the company cannot retain paying customers. I’m giving it a hold rating right now and will revisit it in the following quarters. By The Numbers DOYU’s top line came in at $151.5m, -22% y/y, but beat analysts’ estimates by 11.35m. Non-GAAP EPADS was a loss of $-0.19, but also markedly beat analysts’ estimates by 8 cents. Digging a little deeper into revenues, live-streaming revenues decreased by 34.7% to $107m. The whopping drop can be attributed to the decline in the number of total paying users as well as ARPU due to the prolonged soft economic environment, according to the latest 6K. Innovative business, advertising, and other revenue segments, on the other hand, saw a 50% increase y/y to $44m. This can be attributed to the increase in revenues generated by the company’s innovative business part, such as voice-based social networking service and game membership service. So, if it was a much bigger part of the overall revenue, the top-line performance wouldn’t have been so disappointing. Gross profit came in at $8.7m, which means its gross profit margins are quite low, at around 6%. Even in adjusted terms, the company experienced a net loss of -$5.7m. Looking at some important KPIs, the average mobile monthly active users were down -18% y/y to 42.1m users. Because of this drop, the number of paying users came down to 3.4m from 3.9m, a -13% drop. Regarding the company’s financial position, DOYU has around $564m in cash and equivalents against zero in debt. That is an excellent position to be in, especially when performance is not up to scratch, as we can see from the numbers above. This will give the company time to weather the downturn and find other ways of diversifying away from live stream revenues and returning to meaningful growth. Overall, the quarter was rough, in my opinion. It was only slightly helped by the progress of diversifying away from live-streaming services, which, if the company keeps momentum, should translate into a much softer blow to revenues going forward if live-streaming continues to underperform. On a positive note, the company’s financial position will keep it afloat for a very long time, and chances of a turnaround are decent because of it. The company currently has more cash on its balance sheet than it is trading for. As of writing this update, the company is trading at $307m. Comments on the Outlook The company’s cost of revenue consists of revenue-sharing fees, content costs, and bandwidth costs. Over 85% of total costs come from revenue-sharing fees and content costs. This seems very high. However, it looks like the company competes for the eyes and ears of the Chinese community quite fiercely, and I don’t think the company would be able to pay less for the content to stay on the platform. Even though Twitch (AMZN) is not available in China due to the Great Firewall of China, the company competes with other local platforms, such as HUYA Inc. (HUYA), which has a similar platform that focuses on gaming and eSports. It also has to compete with Douyin (owned by ByteDance, which also owns TikTok) and Kuaishou (KUASF, KSHTY) for the attention of the younger generations, so I think this high revenue-sharing is not going to come down any time soon. Therefore, it needs to put the cash that it amassed over the years to good use and continue to diversify its revenue streams. The company seems to be either losing market share to other platforms, or the Chinese community is not watching as much stuff online as it did before. This could be due to the summer season, which may mean that we will see a decent increase next quarter in MAU and ARPU. But only time will tell, and I will be paying attention next quarter. The company has been doing a decent job in that regard. A 50% y/y growth in other forms of revenues besides live-streaming is very promising, however, since it is still in quite an early stage, it can only soften the blow to the top line so much. The company mentioned that its “voice-based social networking service” was the reason for the segment performing so well. However, I cannot seem to find any other information on it, like its name, for instance, so it is difficult to evaluate this application. Is it free? Is it a premium service that you pay for when you get it? Is there advertising on it? In the company’s 20-F, it says that advertising revenues primarily come from offering various forms of ad services integrated into live-streaming activities, ad display, online and offline events-related ads, and, to a lesser extent, ion its voice-based social networking service. So, it appears that the company isn’t making much revenue off the service just yet. However, if it continues to perform the way it has up until now, it could become a decent revenue generator. I still would like to see how the company will go about monetizing it further, whether going in the premium direction or ad-supported free download. Currently, advertising is not a big business for DOYU. It accounts for roughly 6% of total revenues, which means if it can nail it down properly, it should see a lot of growth. Advertising comes with the highest margins out there. It is very lucrative, just look at Alphabet (GOOG) (GOOGL) and Meta Platforms (META), whose main revenue figures come from advertising. It is not a fair comparison, obviously, but it gives a sense of what can be reached if the company tries harder to monetize through advertising. Even a fifth of the efficiency of Google should be attainable. Closing Comments DouYu International Holdings Limited’s financial position is very enticing; however, I need to see a few more quarters before considering an investment due to the company’s hemorrhaging of users. If there are no users, advertising will not work, so the company needs to find ways to rejuvenate interest in its platform. Offer value, so people will start spending on it once again, which will attract more advertisers. Esports is still enormous, especially in Asia, so the company must provide a good service when the major esports events are happening and monetize it well. I don’t think the adpocalypse that is currently happening on Twitch, as it did on Google's YouTube a few years, is going to affect China. This is mainly because of the different regulations, but there could be something else that can deter advertisers from embracing live-streaming completely. So, in short, I like the company’s financials, but even if it is trading less than its cash position, a dying platform is not going to save it. It needs to continue its efforts of diversification and bring back paying customers to the platform before I would consider it worthy of an investment. I’ll keep an eye on the rest of the year to see how these KPIs develop and will update you if anything interesting happens. I am initiating my coverage with a hold rating.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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