SOGP Sound Group Inc ADR

Operator

Hello ladies and gentlemen. Thank you for standing by for LIZHI, Inc.'s Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After managements remarks there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to your host Effy Kang, Head of Capital Markets for the Company. Please go ahead.

Effy Kang

Thank you very much. Hello everyone and welcome to the LIZHI, Inc's. fourth quarter and fiscal year 2021 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, our COO Mr. Zelong Li and our Acting CFO Ms. Chengfang Lu. Mr. Li and Ms. Lu 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 a 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 discussions will contain forward-looking statements made under the Safe Harbor provision of the U.S. Private Securities 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, advisors, representatives, and underwriters do not undertake any obligation to update this forward-looking information, except as required under the applicable law. Please also 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. Please refer to LIZHI's earnings press release for a reconciliation of unaudited non-GAAP measures to unaudited GAAP measures. I will now turn the call over to our COO, Mr. Zelong Li. Please go ahead.

Zelong Li

[Foreign Language] Hello, everyone. And thank you for joining our fourth quarter and full year 2021 earnings conference call. First of all, on behalf of the LIZHI management team, I would like to express my deep gratitude to our shareholders and investors who have supported us. Throughout 2021, we made continuous progress and a successful implementation of our strategic plan, achieving rapid growth. While continuously expanding our global footprint, we activated our efforts to optimize our diversified product portfolio, strengthen the development of our core technologies, pursue efficiency and maximize value with more refined operational strategies. As a result, we continue to achieve key goals and our journey towards building a sustainable audio ecosystem. [Foreign Language] In the fourth quarter of 2021, Lizhi maintained a steady growth. We continuously heightened our efforts to enrich the audio centric ecosystem, to strengthen user connection and engagement and events commercialization initiatives, all of which lays a solid foundation for our sustainable growth. Thanks to the effective execution of our operational strategy. Average monthly paying users in the fourth quarter increased by 18% year-over-year to 497,3000. And the fourth quarter revenue sees a new record high of RMB560 million, representing a year-over-year increase of 33%. In addition to strong revenue growth, we are also encouraged by the continued expansion of our gross margin, which grew to 32% in the quarter, up 400 basis points year-over-year. In addition, we further improved our profitability. Notably we turned profitable for the first time on a GAAP basis in the fourth quarter, reporting a net income of RMB8.92 million in addition to our non-GAAP net income of RMB18.25 million, increasing two points 37 times [ph] year-over-year. [Foreign Language] In 2021, our successful commercialization strategy execution fueled full year revenue growth of 41% to RMB2.1 billion. The full year gross margin grew to 29%, a increase of 400 basis points compared with 2020. We are also delighted to see that our domestic business achieved operational profitability in fiscal 2021, reaffirming our competitive advantage in the audio space, while establishing a solid foundation for future growth. [Foreign Language] IN terms of audio entertainment, in the second half of 2021 we adjusted our operational and marketing strategy to harness our resources and efforts to target core content categories with greater monetization potential, so our [indiscernible] through the operation management and marketing strategies, we continuously expanded our most active user groups, while improving user experience and increasing user engagement. In the fourth quarter of 2021, we organized and hosted a series of events and activities accentuated by [indiscernible], unleashing the creativity and enthusiasm of our content creators, attracting more medium to long term creators to engage in creating and interacting on the platform, which in turn increases user engagement and boost communities connectivity. We were pleased to see that the average MAU of our audio entertainment business continue to expand to 9.4 million in the fourth quarter, with both the pain user base and the revenue maintaining a robust growth momentum for the rest [ph] our commercialization capabilities. In the future, we will continue to expand the commercialization potential of our audio entertainment business, remains steadfast in our efforts to enhance our commercialization efficiency, and ultimately deliver overall growth over the long term. [Foreign Language] In the fourth quarter, we continue to optimize product features and functions of our global social product TIYA, include adding access to the YouTube SDK. We remain focused on boosting user engagement through product innovation for the improving user stickiness and active into reaction rates. In December, the average time spent daily in real time voice room per user increased by 68% year-over-year, and the number of parents or friends connections continued to grow. And in December due to the new one exhibiting 14 fold increase compared with December 2020. In addition, by the end of 2021, the cumulative downloads of TIYA reached closed to 20 million. Recently, we rolled out a brand new version of TIYA. In addition to optimizing user interface design, we further improved the product versatility and the usability for the upgraded version. Notably, we launched the innovative feature referred to real time interactive group space. This new feature is designed to help users from online connections more easily and efficiently, as well as build their online community more engaging, multiple, typically only one click is needed for users to switch to the multi user real time interactive space. We are the novel group space, which enables faster and more efficient real time voice communication through voice text image, screen sharing YouTube SDK and other multimedia functions, users can have a richer set of real time group interactions. In addition, this new version of TIYA is able to support both private and public group interactions basis, enabling users to connect with their acquaintances and friends through private group space. In the meantime, public spaces on TIYA can be recommended and discovered based on user preferences, which may help users enrich their online social network. Now, we are also planning to entice more offline groups and KOLs to join TIYA and create vibrant, diverse interest based communities. [Foreign Language] This new GI edition marks another milestone on our product innovation roadmap. In 2022, we will keep - adhere to a balance of growth strategy and driving robust organic growth, while maintaining cost control. Another highlight of our international expansion is that TIYA recently officially established its global headquarters in Singapore. The headquarter will serve as the global hub for innovation for TIYA, as well as the BG Group to help nurture teams of talent and fully support the expansion of LIZHI's international business. [Foreign Language] Looking back on 2021, while focusing on product innovation, we also actively advance the development of our in-house suite of technologies. We are convinced that core technologies help us provide users with regional audio entertainment offerings, and more interactive social experiences, building a deep mode for our business. We are very pleased to see that our in-house developed RTC real time audio and video streaming technology solutions DOREME and the instant voice messaging app of VoderX are continuing empowering our product enhancement capabilities. By providing tailored technology solutions DOREME and VoderX collectively allow us to consistently innovate and enrich product features and functions to align with users diverse needs, ultimately creating unparalleled value for our users. In addition, our enhanced suite of technologies also bolsters our multi device product roadmap, including enhancing compatibility with the variety of link [ph] operating systems and international vehicle platforms, supporting various applications of LIZHI products under diverse usage scenarios and improving income user experience through words processing and high definition audio transmission technologies. In the next phase, we will continue to invest in leading-edge technologies, encompass [ph] in house R&D, to strengthen our core technology capabilities and create an industry leading real time engagement, RTE [ph] ecosystem to power the development of our product portfolio. [Foreign Language] In summary, in 2021, the robust growth across our diversified businesses, advancements in our in house technologies and the continuous optimization of our organizational system have built a solid base for long term development. Moving into 2022, we remain unwavering in our globalization strategy, exploring more regions and territories with diversified product portfolio, leveraging well established operational experience and localized innovation to tap into more commercialization potential, building an increasingly competitive audio ecosystem, and ultimately creating more value for our shareholders, as well as the wider society. [Foreign Language] Thank you all. With that, I will now turn the call over to our Acting CFO, Ms. Chengfang, who will discuss our financial results in more detail.

Chengfang Lu

Okay. Thank you, Zelong. Hello, everyone. Our strong financial performance in the fourth quarter and in fiscal 2021 exemplifies the Company’s successful execution of our strategy in meeting growing user demand for audio-based entertainment and social networking. Benefiting from the continuous fine-tuning of our operations and optimization of the cost structure, our gross margin in the fourth quarter hit a record high at 32%, up 400 basis points year-over-year, also adding up to a 400 basis points increase in the full year gross margin. In the fourth quarter, we achieved a net income of RMB8.9 million and the non-GAAP net income increased by 237% to RMB18.3 million. We’re encouraged by the robust growth in our audio entertainment business and our efficient and effective commercialization execution strategy. As we further unroll our global expansion plans in 2022, we will maintain our intense focus on providing innovative and valuable products and services to our users while building a more competitive audio ecosystem. Now, I'll provide a brief overview of our financial results for the fourth quarter of 2021. First in the fourth quarter, our total net revenues were RMB560.3 million, representing an increase of 33% year-over-year, primarily due to the increases in the number of average marketing paying users and the average amount of user spending on our audio entertainment products. Cost of revenues was RMB378.4 million in the fourth quarter of 2021, representing an increase of 26% year-over-year, mainly attributable to an increase in the revenue sharing fees to our content creators, the salary and welfare benefits expenses and bandwidth costs, as we expanded our business. Gross profit was RMB181.9 million in the fourth quarter of 2021, representing an increase of 53% year-over-year. Non-GAAP gross profit was RMB184.4 million in the fourth quarter of 2021, representing an increase of 50% year-over-year. Gross margin for the fourth quarter of 2021 increased to 32% from 28% in the fourth quarter of 2020. Non-GAAP gross margin for the fourth quarter of 2021 grew to 33%, from 29% in the fourth quarter of 2020. Operating expenses increased by 41% year-over-year to RMB176.6 million in the fourth quarter of 2021. Research and development expenses were RMB73.5 million in the fourth quarter of 2021, representing a year-over-year increase of 30%. The increase was primarily due to the increasing salary and welfare benefits expenses related to the increase in the number of our research and development staff and average salary. Selling and marketing expenses were RMB70.9 million in the fourth quarter of 2021, representing an increase of 46% year-over-year. The increase was attributable to the increases in the marketing expenses to promote the Company’s audio entertainment products, the promotional expenses for our international business, and the higher salary and welfare benefits expenses. General and administrative expenses were RMB32.2 million in the fourth quarter of 2021, representing a year-over-year increase of 59%. The increase was mainly due to the increasing salary and welfare benefits expenses, rental expenses and other general and administrative expenses. Operating income was RMB5.4 million in the fourth quarter of 2021, compared to a loss RMB6.4 million in the fourth quarter of 2020. Non-GAAP operating income was RMB14.7 million in the fourth quarter of 2021, compared to RMB4.9 million in the fourth quarter of 2020. Net income was RMB8.9 million in the fourth quarter of 2021, compared to net loss of RMB5.8 million in the fourth quarter of 2020. Non-GAAP net income was RMB18.3 million, representing a year-over-year increase 237%. Basic and diluted net income per ADS were RMB0.17 in the fourth quarter of 2021, compared to basic and diluted net loss per ADS of RMB0.13 in the fourth quarter of 2020. Non-GAAP basic and diluted net income per ADS8 were RMB0.36 in the fourth quarter of 2021, compared to RMB0.12 in the fourth quarter of 2020. As of December 31, 2021, we had cash and cash equivalents and restricted cash of RMB537.4 million. Okay. This concludes our prepared remarks today. And I will now turn the call to questions. Operator, please go ahead.

Operator

For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. For the sake of clarity and order, please ask one question at a time. Management will respond and then feel free to follow up with your next question. Your first question comes from the line of Vincent Yu from Needham and Company. Please ask your question.

Vincent Yu

Thank you management for taking my question. I have two questions. The first question is on the profitability. I do see that in our Q4 we have become profitable in terms of GAAP net income. So what's our view on for profitability in 2020, I am sorry, 2022 and our mid to long term prospects for the profitability? My second question is, can management's elaborate more on the pain [ph] rates improvements? Thank you.

Unidentified Company Representative

Okay. , thank you, Vincent from Needham. Firstly, I will translate the question. The first question from Needham. [Foreign Language]

Marco Lai

[Foreign Language]

Unidentified Company Representative

I'll translate for Marco. So the first question from Vincent from Needham is about the profitability and our long term expectations for the profitability. We are delighted to see that for the first time we achieved profitable on a GAAP basis and substantially increased our non-GAAP net income in the fourth quarter of 2021. Which is mainly due to our effective execution of our strategies on the cost reduction and efficiency enhancement. As of the profit forecast for the full year of 2022, in terms of top line, we will continue to expand the user base, increase the number of paying users and user spending levels in the audio entertainment segment in order to unleash the commercialization potential of the audio entertainment business.

Marco Lai

[Foreign Language]

Unidentified Company Representative

Meanwhile, we also plan to explore more markets and develop new commercialization models and drag the overall revenue growth. For different quarters of the year there may be fluctuations caused by factors such as festivals and holidays. But we expected the overall revenue will maintain solid growth momentum in the year.

Marco Lai

[Foreign Language]

Unidentified Company Representative

In terms of operating expenses [indiscernible] adjusted resources allocation according to the progress made during each phase. For the domestic business, we offer the in demand [ph] strategies to control costs and enhance efficiency in order to achieve profitability at the operating level. For the international business, we will adopt a strategy of balanced growth, while controlling the investment size, maximizing the operational efficiency, establishing a network effect for our products and achieving organic growth in our user numbers. Overall, we are confident we will further narrow our losses in 2022 and build a solid foundation for us to achieve our mid to long term profitability target.

Marco Lai

[Foreign Language]

Unidentified Company Representative

For mid to long term growth, we hope to further diversify our revenue, including developing new markets and incubating new products to gradually increase the income from the international business to boost the overall revenue growth. Meanwhile, we will continue to optimize the cost structure, improve operating efficiency, reduce the overall expense ratio and promote business growth with the goal of achieving overall profitability in the mid to long term. This concludes with Marcos answers.

Marco Lai

[Foreign Language]

Unidentified Company Representative

In the fourth quarter of 2021, we achieved 18% year-over-year increase in the average monthly pay user base to 500,000. While our quarterly revenue is a new record high. This is mostly due to two reasons. First of all, we focused on the order entertainment business, and launched the diverse promotional activities to further trigger the creativity and enthusiasm of our content creators in order to boost the user participation. And the effects really promote the pain user conversion. On the other hand, on the marketing strategy front, we focused more on the core content categories to acquire customer accuracy, by transcending [ph] ties between the users and content creators, and leveraging the advantages of audio, we can consolidate user connection and engagement to promote the conversion of the pay users.

Marco Lai

[Foreign Language]

Unidentified Company Representative

In 2022, in addition to continuing to explore the domestic market, we will also leveraging our experience to continue to expand our business into more countries and regions through our fine tuning operations, increase the overall pay user base, raise user standard [ph] levels and drive the top line growth this year.

Marco Lai

[Foreign Language] Thank you.

Vincent Yu

[Foreign Language] Thank you, Marco.

Operator

Your next question comes from the line of Vicky Wei from Citi. Please ask your question.

Vicky Wei

[Foreign Language] Good evening, management. Thanks for taking my questions and congrats on the profitable quarter. Will management share some color about the 2022 growth strategy, as well as audio entertainment sector outlook for 2022? Thank you.

Marco Lai

[Foreign Language]

Unidentified Company Representative

I'll translate for Marco. We are confident we can continue to scale our growth in the future. With the effective implementation of our globalization strategy, we are expecting the international business to generate incremental growth for our overall user base. Recently, we have focused on the continuous optimization and upgrading of our products, which we believe will effectively increase the user engagement and grow our user base.

Marco Lai

[Foreign Language]

Unidentified Company Representative

Moving forward, we will actively explore and expand into the new markets and build a more diversified product portfolio. We are looking to reproduce our successful experience and business models in the domestic audio entertainment sector into other markets and localize operations according to differences of these various markets, ultimately growing and experiencing new commercialization potential. And we have been preparing for this expansion. We are expecting our international business user base to achieve strong growth in the mid to long term and contributes to future revenue growth.

Marco Lai

[Foreign Language]

Unidentified Company Representative

In terms of our domestic business, we mainly focus on the user base expansion in the order entertainment sector and monetization of the core user groups. Our excellent performance in the fourth quarter also demonstrated the effectiveness of our operational strategies. We will continue to optimize our marketing strategy and target content categories with greater monetization potential, as well as execute on our precise user acquisition strategy to reach core user groups with strong spending power and a higher willingness to pay. In addition through optimizing product function, and now launching the diversified activities, we can successfully improve user engagement and paying user commercial thereby driving the top line growth.

Marco Lai

[Foreign Language]

Unidentified Company Representative

Regarding to the order entertainment sector, we think the sector has a strong commercialization potential. In the second half of last year, we began to optimize our operational and market strategies, which effectively improved the conversion of paying user base and of the order entertainment and in terms of the revenue growth. At the same time, we also optimized our costs of structure to further improve the gross margin, while the gross profit was up 53% year-over-year. In addition, we turn profitable on a GAAP basis in the fourth quarter, while [indiscernible] just domestic business already achieving the operational profitability in 2021.

Marco Lai

[Foreign Language]

Unidentified Company Representative

In 2022, we will continue to implement our optimized operational strategies in the audio entertainment sector, expand almost the active user groups and launch the diversified functions in order to promote the conversion of paying users, increase user spend levels and improve overall revenue and profitability.

Marco Lai

[Foreign Language]

Unidentified Company Representative

Thank you.

Vicky Wei

Thank you.

Operator

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

Effy Kang

Thank you once again for joining us today. If you have further questions, please feel free to contact me, just investor relations through the contact information provided on our website at ir.lizhi.fm and The Piacente Group Investor Relations. Thank you.

Operator

This concludes the conference call. You may now disconnect your line. Thank you.