A Quick Look At DouYu's Esports-Focused IPO Filing

Alex Wilhelm alex

Morning Markets: China-based streaming and esports company DouYu has filed to go public. Let’s take a look.

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Continuing our 2019 IPO coverage, meet DouYu. Based in Wuhan, China, the company has raised over $1 billion according to Crunchbase since its birth in 2013. Sequoia China and Tencent helped finance DouYu’s growth.

DouYu was last valued at $2.4 billion according to Crunchbase data, making the deal yet another unicorn IPO. And as the company is targeting the New York Stock Exchange for its debut, it’s an offering we need to understand.

We’ll approach the company from two perspectives. First, some notes on its business, then the resulting numbers.

How Big Is Streaming?

DouYu claims to be the “largest game-centric live streaming platform in China.” The numbers backing up the statement are notable.

According to DouYu’s F-1 filing, “[a]s of December 31, 2016, 2017 and 2018, we had 98.7 million, 182.1 million and 253.6 million registered users, respectively.” Registered users growth helped DouYu tally 153.5 million MAUs in the fourth quarter of 2018, up from 134.3 million in the year-ago Q4.

That’s a lot of people. And, notably, DouYu isn’t spending heavily to acquire them. According to the filing, its “user base is primarily acquired through organic growth, with over 92% of our new mobile users in the fourth quarter of 2018 [installing] our apps without third-party marketing.” Of course, mobile users are a fraction of its total user base, but the data point is useful all the same.

There are other stats provided, including that DouYu “active users” spent 24.2 million hours per day on the platform in the fourth quarter of 2018, up from 17.2 million in the year-ago period. And that it had 6.0 million “registered streamers” in the fourth quarter of 2018, up from 3.9 million in Q4 2017.

All that usage drives revenue. How? In one main way, it turns out. According to DouYu, live streaming “generated 77.7%, 80.7% and 86.1% of our total net revenue in 2016, 2017 and 2018, respectively,” which was “primarily derived from the sales of a wide array of virtual gifts.”

So, nearly 9 in every 10 dollars of DouYu revenue generated last year came from the purchase of “virtual gifts.” How high does that money stack? Let’s find out.

The Numbers

DouYu is an odd company. It grew its revenue to more than a half billion dollars in 2018 but generated gross profit losses in both 2016 and 2017. A company this large failing to have positive gross margins over a multi-year period is rare.

Given its history of gross margin losses, DouYu does not have a history of operating income, let alone net profit.

Off of $531.5 million in revenue in 2018, the company generated a slim $22 million in gross profit. $147 million in full-year operating costs led to a $125 million operating loss. DouYu’s full-year net loss came to $127.4 million.

While DouYu’s operating losses are steep, the company does have a history of quick revenue growth. In RMB, here’s how fast the streaming company grew over a three-year period:

2016: 786.9 million RMB
2017: 1,885.7 million RMB
2018: 3,654.4 million RMB

That’s a few doubles in a row. Investors love to see that sort of growth. And since DouYu has a history of improving gross margins, you can somewhat trace out a path to less unprofitability at the firm. However, sans gross margin improvements, DouYu will need far-lager revenues to generate enough gross profit to cover its operating costs.

DouYu doesn’t need to raise money. It has over $800 million in cash and equivalents in the bank and burned less than $90 million in cash during 2018 (operating and investing cash flow, combined). So, the company has enough money to grow for a long time.

That makes an IPO look like a liquidity event, instead of a fundraising effort. With over $1 billion raised, the company has a lot of pressure behind it to provide a return. And the IPO window is open. So, out goes DouYu long before it can draft a clear map to profitability.

Yes, it’s good that companies are going public before they are nearly done growing up. But the pendulum can swing the other direction as well.

Illustration: Li-Anne Dias.