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Sound Group Inc. (SOGP)

Q3 2020 Earnings Call· Tue, Nov 10, 2020

$14.15

-1.39%

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Transcript

Operator

Operator

Hello, ladies and gentlemen, thank you for standing by for Lizhi Inc.'s Third Quarter 2020 Earnings Conference Call. [Operator Instructions]. I will now turn the call over to your host, Effy Kang, Head of Capital Markets for the company. Please go ahead.

Effy Kang

Analyst

Thank you very much. Hello, everyone, and welcome to Lizhi Inc.'s Third Quarter 2020 Earnings Conference Call. We released our financial and operating results via newswire services earlier today, and they are available online. Participants on today's call will include our founder and CEO, Mr. Marco Lai; and our acting CFO, Ms. Chengfang Lu. Management will begin with prepared remarks, and the call will conclude with a Q&A session. As a reminder, this conference is being recorded. In addition, our earnings highlights presentation and the webcast replay of this conference call will be available on the IR section of our website at ir.lizhi.fm. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Secretive Litigation Reform Act of 1995. These statements typically contain words such as may, will, expect, target, estimate, intend, believe, potential, continue or other similar expressions. Forward-looking statements involve inherent risks and uncertainties. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause actual results to differ materially from those projected or anticipated, many of which factors are beyond our control. The company, its affiliates, advisers, representatives and underwriters do not undertake any obligation to update these forward-looking information, except as required under the applicable law. Please note that Lizhi's earnings press release and this conference call include discussions of unaudited GAAP financial measures as well as unaudited non-GAAP financial measures. Lizhi's press release contains a reconciliation of unaudited non-GAAP measures to unaudited GAAP measures. I will now turn the call over to our Founder and CEO, Mr. Marco Lai. Please go ahead.

Marco Lai

Analyst

Hello, everyone. Thank you for joining us today. Our healthy third quarter results amid COVID-19 normalization in China reflected our leading national position in the online audio sector. For the first time since going public, we achieved a non-GAAP quarterly profit, which is also a testament to the scalability and robustness of our business model. Our dedication to keep enriching and optimizing our content offering as well as leveraging high-quality user-generated content continues to drive user traction and engagement. We also introduced many more innovative features to further improve user experiences. In the third quarter, our monthly average user base grew by 21% year-over-year, reaching 56.2 million, and our monthly average paying user base increased by 17% year-over-year. Additionally, we saw a rebound in the average user spending, signifying the increasing value of our distinctive content ecosystem. The number of average monthly active content creators reached 6.15 million during the quarter. And thanks to our efforts to -- on driving interactions and engagement between content creators and users through audio entertainment features, the quarterly audio entertainment user penetration rate increased to 13.5% from 12.8% a year ago. Despite unprecedented challenges in the macro environment this year, our growth momentum reaffirms our ability to capture rising demand for high-quality digital audio experiences and audio interactions. Lizhi is at the forefront of the rapidly developing audio entertainment market by providing users with captivating listening experiences, driving creation of premium content and expanding user engagement opportunities. We are committed to unlocking the great potential of the online audio market to achieve our well-defined vision for the future. I will now discuss the key areas of focus during the third quarter. Firstly, we're continuously expanding and optimizing our extensive and diverse user-generated content portfolios to be well positioned for sustainable growth. As we have…

Chengfang Lu

Analyst

Thank you, Marco, and hello, everyone. We are pleased that our third quarter financial results were in line with our expectations and our endeavor to increase operating leverage brought about a set of improvements in profitability during the quarter. In the third quarter, our total net revenues increased by 10% to RMB361.5 million throughout the same period of 2019, mainly contributed by the growth in our paying user base. Our average number of monthly paying user increased by 17% year-over-year to 448,300 in the third quarter, driven by our content offering strategy and around unremitting efforts in driving user traction and engagement. Currently, we generate our revenue primarily from our audio entertainment business, which contributed RMB355.8 million to net revenues in the third quarter of 2020, representing a year-over-year growth of 9%. The increase was mainly due to our increasingly expanding user base and increasing the number of paying users for our interactive audio social entertainment product during the period. Additionally, podcast, advertising and other revenue grew by 61% year-over-year to RMB5.7 million in the third quarter of 2020. The increase was mainly due to an increase in the number of paying users in our podcast services and advertisers. Cost of revenue increased by 2%, both year-over-year and quarter-over-quarter, to RMB270.9 million. The year-over-year increase was mainly due to the increase of salary and welfare benefits, payment handling costs and bandwidth cost, which were generally in line with the growth of the company's business as well as the recognition of share-based compensation expenses that became effective upon and after our IPO, partially offset by a 1% decrease in the revenue sharing fees because of the incentive program for content creators we launched in the third quarter of 2019 has been scaled down since February 2020. The quarter-over-quarter increase was mainly…

Operator

Operator

[Operator Instructions]. Our first question comes from the line of Vincent Yu of Needham & Company.

Vincent Yu

Analyst

I actually have a few questions. My first question is, can you guys comment on the total time spent by user on the platform as the summer break was shortened during this third quarter? The second question is, can you comment on the paying behaviors, our highest-paying user cohort? Have you seen a significant rebound after COVID-19 subsided? Third question is, do we have any updates regarding the celebrity live streaming initiative and advertisement initiative? My fourth question is about the data regarding -- around podcast and live streaming dual subscription program.

Marco Lai

Analyst

Okay. Marco will take the first 3 questions, and I will translate for him. For the first question, it's about the time spent by users on the platform. So with the shorter summer break, we still maintained the average daily usage time of 52 minutes, which is thanks to our efforts on meeting diversified demand from users. So in this quarter, we launched a series of themed events; and further enriched and highlighted our premium content, the massive high-quality content pool and diversified interactive features; further improved our platform's appeal to users; ensured the usage time and enhanced the vitality of our community. Okay. For the second question, it's about the highest-paying user cohort and the rebound after the COVID-19 subsided. So first of all, the audio live streaming is quite different from the video live streaming. So online audio is much more a mass market. The concentration of paying user is relatively lower, with limited revenue concentration among the top users. So overall, we saw users have better balance of online and off-line consumption while the resumption of work and school. And online consumption is recovering. We saw a rebound in average ordinary user spending compared to last quarter, which is not due to the highest-paying user cohort. So in terms of celebrity live streaming, we provided a platform for celebrities to interact with fans and a channel for fans to meet and interact with celebrities more closely. Many popular celebrities are willing to interact and communicate with fans through our online audio entertainment features. So in the meantime, we are dedicated to meeting users' needs of interaction with celebrities through different programs and in reaching the live streaming content through various means. So Marco take the example of we invited Zhang Zining, a former member of Rocket Girls 101, which you might have heard about, a highly popular girl group, to our platform for audio live streaming and actively interacted with her fans. The exposure accounted for more than 2 million times. In addition, we also collaborated with a number of popular TV shows to host creative events. The audio live shows, we cooperated with SNH48, a popular girl group; and Yang Yingge, a performer in the show of The Coming One: Super Band, with a lot of attention and discussions among fans with more than 1 million times exposure across the Internet and 600,000 times cumulative plays. In terms of the advertising, we believe that advertising for audio live streaming is quite high potential. So we currently mainly focus on optimizing the advertising management platform at the current stage, which is expected to have more positive impact in the future.

Vincent Yu

Analyst

And Marco, can I ask one more question?

Effy Kang

Analyst

Yes.

Vincent Yu

Analyst

Sorry, Marco, can I ask just one more question? So like you mentioned that we are developing that on the audio of cars. So I'm wondering, are we going to work with auto manufacturers or the software platforms, which are -- to install on these auto manufacturers? And also, it feels like for this audio, which will be used on cars while driving, will heavily rely on, like, recommendation and also voice control. Do we -- are we planning to more do sales developments? Or are we going to work with some algorithm or provider? Or like, will there be any impact on R&D?

Marco Lai

Analyst

Okay. Thank you. So we think the entire audio market is a high-potential market, especially for the new energy vehicle producers. And for the use of audio application, it's more about the focus we will concentrate on, especially in the product side and also the algorithm. We are going to improve both of the product, also the algorithm combined with our AI technology. Firstly, we will improve the user experiences for the in-car audio product. And you are right that other products might not be applicable in the -- to use in the in-car audio system. Another side is for the AI recommendation. AI recommendation is very important for the in-car audio market. And we do have years of experiences in the technology, and also, we have leading technology capabilities which we can use to deploy into the in-car audio market. As for now, our focus is more on the AI technology and also the improvement of the user experiences. Thank you.

Operator

Operator

We have a question from Vicky Wei of Citi.

Vicky Wei

Analyst

Congratulations for the profitability for this quarter. I have two questions. The first one is about the fourth quarter initiative. So we saw the guidance was up on a quarterly basis. May I ask, is there any major marketing event or activity during the quarter? And if so, will there be any implication for the expense line? And my second question is about the implication on the recent regulation about the limitation of -- on the user tipping, including large donor and minor donor? What does it imply for the Lizhi paying user?

Chengfang Lu

Analyst

Thank you for your questions, and let me share some information about our major investments in the second half of this year. Actually, as Marco mentioned about, this quarter, we were more focused on platform development and improving operating efficiency. And in the fourth quarter, we will host regular operating events, and by end of the year, we plan to hold an annual voice ceremony and -- which we believe would stimulate revenue as well. And in addition, we are incorporating new audio podcast products and plan to fully enter into the in-car audio market, enabling more users to listen to high-quality products. And we believe this will help content creators gain more attention and expand their user base as well. Meanwhile, we will also adjust our promotion and incentive policies based on the actual situation, and we expect our revenue sharing policy remains stable generally in the fourth quarter. Thank you. And I will turn to Marco for the second question. So at present, some of the regulations is more about the live streaming platforms and the user behaviors on the live streaming platforms. It actually takes a long time for those regulatory departments to process the regulations as many -- like, according to different aspects in the market, which I believe is reasonable for the industry. As for Lizhi, we actually have been committed to implementing the regulatory policies and apply strict control on user behavior identification functions on the platform. As for the underage users, Lizhi has developed and launched the underage mode in last December to protect their rights and interests from the perspective of product functions, which has reduced the risk brought by the underage virtual gifting behavior. We have also been actively cooperating with relevant departments to meet the network security standard. For example, in September, we launched the audiobook network literacy for teenagers on our platform and actively spread knowledge of network security. So in general, the concentration of paying users on Lizhi is relatively low. The audio entertainment sector, which is based on voice interaction, focuses more on the emotional connection between user and the host as voice is more about the companionship. The main driver for paying activities is the strong bond between the user and content creators as well as their relationship. So impulsive virtual gifting behaviors are very rare on our platform. In general, we don't think the regulation will have much impact on our current business development. We will continue to actively implement relevant regulatory requirements and intend to set up the online audio branches who cooperate with key units and relevant agencies in the online audio field to promote the standardization of the industry and self-regulation of the industry players and to meet the requirements of other related departments. Thank you.

Operator

Operator

Your next question is from Billy Leung of Haitong.

Billy Leung

Analyst

I have two questions. The first question is, can management share color or some details of our latest cooperation with the Guangdong government? Any implications on revenue or investments going forward? And my second question is on 2021 outlook. Can management share any expectations or guidance in terms of maybe revenues or users?

Marco Lai

Analyst

So the first question is about the pilot online audiovisual program Lizhi has been selected into. So we think Lizhi was selected as one of the pilot online audiovisual companies in Guangdong province is actually a great recognition from the regulatory authorities over the company's top position in the industry and also a demonstration, in fact, of Lizhi's practices. So this will actually play a guiding role for us and for our future development of content categorization and AI technology development and also the big data analytics. It will also increase our industry impact and enable us to receive more support in the technology development and innovation. So in general, our next step will more focus on the enhancement of our platform construction and focus on the unique UGC feature, and support our content creators drive the long-term growth through AI technology and explore the diversified business models, including committing ourselves to expanding the audio application scenarios and also bringing users the real interactive audio entertainment experiences. Okay. So for next year's forecast, we think it's still too early to say anything about that. So we need more time to -- for our future development. So currently, we will not discuss the detailed forecast for next year. Thank you.

Operator

Operator

Your next question is from Ivy Liu of Credit Suisse.

Ivy Liu

Analyst

What's management's view on current audio live streaming or audio entertainment competition landscape on the audio live streaming sector? And do you guys -- if you guys have any plan on overseas expansion.

Marco Lai

Analyst

So compared with other platforms in terms of the competition, Lizhi has always been targeting the audio market with a strong focus on diversifying the content and committed to developing the unique UGC business model. With years of development and efforts, we've developed a massive content pool and built a strong community atmosphere and being committed to providing a highly engaged and interactive community while creating more possibilities for audio through our leading technologies. So in terms of commercialization, we've actually established an effective reward mechanism for our content creators and further enhanced the content creation and improved our content quality. We will continue to meet users' diversified demand for audio and help them express themselves and then receive the companionship with other voices. Through a variety of focus area like content creation, community and audio interaction features, we are also dedicated to help content creators present themselves, gain recognition and achieve considerable income through voices. We believe the audio industry is actually a blue ocean market, and we believe Lizhi has differentiated and competitive advantages in the market. In addition, I personally think the audio market is just beginning to develop, and the application scenarios of audio are diverse. With the increasing popularity of intelligent vehicles and like smart home devices, the growth potential for the online audio industry is sizable. As mentioned earlier, we are exploring the in-car audio market, and we believe the development of audio devices can actually further enhance our competitive advantages. So in terms of the overseas expansion, we think the overseas market is actually huge. And users have a strong demand for audio products. We are preparing and developing some of the products in the overseas expansion. And when we have more efforts and when we have more results, we will disclose to the market. Thank you.

Operator

Operator

As there are no further questions, now I'd like to turn the call back over to the company for the closing remarks.

Effy Kang

Analyst

Thank you once again for joining us today. But if you have further questions, please feel free to contact Lizhi's Investor Relations through the contact information provided on our website at ir.lizhi.fm or the TPG Investor Relations group. Thank you.

Marco Lai

Analyst

Thank you. Thank you, everyone.

Operator

Operator

Thank you. Ladies and gentlemen, this concludes the conference call. You may now disconnect your lines. Thank you.