Bilibili Inc. Q1 FY2022 Earnings Call

Good day, and welcome to the Bilibili 2022 First Quarter Financial Results and Business Update Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Juliet Yang, Executive Director of Investor Relations. Please, go ahead.

Thank you, operator. During this call, we'll discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially from those mentioned in today's news release and in this discussion due to a number of risks and uncertainties, including those mentioned in our most recent filing with the SEC and Hong Kong Stock Exchange. The non-GAAP financial measures we provide are for comparison purposes only. Definitions of these measures and a reconciliation table are available in the news release we issued earlier today. As a reminder, this conference is being recorded. In addition, an investor presentation and a webcast replay of this conference call will be available on the Bilibili IR website at ir.bilibili.com. Joining us today from Bilibili senior management are Mr. Rui Chen, Chairman of the Board and Chief Executive Officer; Ms. Carly Li, Vice Chairwoman of the Board and Chief Operating Officer; and Mr. Xin Fan, Chief Financial Officer. And I'll now turn the call over to Mr. Fan, who will read the prepared remarks on behalf of Mr. Chen.

Thank you, Juliet. And thank you, everyone, for participating in our 2022 first quarter results conference call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. In the first quarter, the unexpected outbreak of COVID-19 struck China nationwide, impacting people's everyday lives. Shanghai, where our headquarters are based, was particularly impacted by the strict lockdown. During this challenging time, our top priority is the health and safety of our employees. Over 8,000 of our staff members have been working from home since mid-March, and we arranged essentials to be delivered to our employees in Shanghai where it was the most difficult to get supplies. In addition, we opened our documentary library to the public free of charge during the May holidays and donated 2 million premium Bilibili memberships to Shanghai citizens. We are glad to see that the lockdown just ended last week and hope everyone's life and our daily business can return to normal order too. Confronting the challenges, our business foundation remains strong and resilient. In the first quarter, our vibrant community continued to grow at a faster pace. Total MAUs grew by 31% year-over-year to 294 million, and the DAUs grew even faster at 32% year-over-year, reaching 79 million. Total user traffic, which we calculate as DAUs multiplied by daily time spent per user, grew 52% year-over-year. During this period, each user spent an average of 95 minutes on Bilibili per day, the longest we have seen in our operating history. These strong user metrics represent our solid business fundamentals, and we are seeing the momentum continue as we move through the second quarter. Despite the short-term impact from the COVID lockdown, our total net revenue for the first quarter came in at RMB 5.05 billion, up 30% year-over-year. In the first quarter, both our paying ratio and NPUs reached a record high of 9.3% and 27.2 million, respectively. Live broadcasting was a major driver during the period with paying user members growing 60% year-over-year. Despite softer industry demand, we continue to gain market share in advertising, growing our ad revenue by 46% year-on-year in Q1. Improving our ad efficiency and exploring new products, such as ads in Story Mode, are a few of the initiatives we expect to leverage as we work our way through the challenging macro environment in the coming quarters. User growth, effective spending control, and improving our operating efficiency are our top goals. We have made some progress on each of these fronts in Q1. Sales and marketing expenses decreased by 29% quarter-over-quarter, accounting for 25% of total revenue, down from 31% in the previous quarter. Server and bandwidth costs decreased by 2% quarter-over-quarter, which was no small feat, given our daily video views increased by 36% sequentially. We continue to invest in R&D in Q1, which we believe is essential for long-term and sustainable growth. Regardless of the pandemic's impact on our short-term financial metrics, we remain committed to our mid and long-term growth of narrowing our loss ratio and reaching breakeven. Moving forward, we will further strengthen our commercialization capabilities, control costs, and improve human capital efficiency. With that overview, I’d like to go through some details of our first quarter operations across our content, community, and commercialization. Bilibili's unique content and community offerings provide our users an irreplaceable experience in the online video space. Since 2021, we have successfully expanded to a video community by launching our Story Mode and the Smart TV app. These have effectively brought our rich content to users in more formats that resonate with them across different viewing preferences. User response to our short-form video Story Mode has been very inspiring. This short-form video with Bilibili features provides a unique working experience to satisfy users' on-the-go entertainment needs. Story Mode brought an incremental increase in total video consumption, contributing more than 20% of our total video views in the first quarter. And these numbers have continued to grow in Q2. In addition to more views and creating deeper community bonds, Story Mode has also opened up a new avenue for commercialization opportunities with advertisers as well as our live broadcasting services. During the period, users primarily engaged with content in the lifestyles, games, entertainment, ATG, and knowledge categories. Across these top verticals and others, content creation remains robust. Monthly average content submission was 12.6 million, increasing by 63% compared with the same period last year. Monthly active creators during the quarter were 3.8 million, up 75% year-over-year. The deep value we place on our creators is one of the reasons we are able to maintain our robust content and healthy community, key to motivating their continuous creation to help them gain recognition and provide monetary rewards. We are providing them with both. Content creators with more than 10,000 followers increased by 44% in the first quarter. Beyond our cash incentive program, content creators are encouraged to realize their commercial value more fully through multiple avenues, including live broadcasting, our Sparkle ad platform, creator-recommended ads, and direct tips from users. In the first quarter, a total of 1.1 million content creators had received monetary compensation for their work, up 19% year-over-year. As for our community, we continue to foster an active environment for our users to get closer to the content and interact with creators and each other. We can see this not only with the record average daily time spent on our platform of 95 minutes in the first quarter but also in the increased daily video views, which grew by an impressive 84% year-over-year to nearly 3 billion. The number of commercial interactions in Q1 reached 12.3 billion, up an impressive 87% year-over-year. The bond between our users and the community has continued to grow. By the end of March, we had 158 million official members, or 41%, with a stable 12-month retention rate of 83%. Both our Story Mode and the Smart TV app have played a positive growth role in driving engagement levels. Now let's take a look at our commercialization efforts. Accelerating our commercialization efforts is our most important target this year. Despite the macro headwinds, our business is resilient. Our advertising and e-commerce business have and will be particularly impacted in the near term. We are paying more attention to the quality of our revenue growth, particularly the margin contribution of each business segment. For our game business, in the first quarter, net revenues from our game business increased 16% year-over-year to RMB 1.36 billion. We continue to invest in in-house game development by acquiring a new studio in the first quarter. At the same time, we're closely monitoring our existing projects and conducting agile testing to keep our pipeline ahead of the fast-evolving industry. We're also working to improve our industrialized development capabilities, which is equally important in landing an idea that works. Turning to our pipeline, three games have already been approved while some others are in the late approval stage. For our game operation in the overseas market, we have three titles for launch in the second quarter, with more planned for the second half of this year. Now turning to our VAS business. Net revenues for VAS were RMB 2.05 billion, an increase of 37% year-over-year, and beyond the pandemic, there are a lot of monetization opportunities in this segment, particularly in live broadcasting and other innovative community-related value-added services. Our power for PUGV video library and the pool of talented creators give us a unique advantage to leverage and reinforce our live broadcasting business. In the first quarter, the number of active live broadcasters on Bilibili increased by 88% year-over-year. We continue to roll out more tools and features to let creators showcase their talent and introduce new forms of interactive virtual gifting programs. Meanwhile, the popularity of Story Mode opened a new gateway for users to discover interesting live broadcasting content. With these initiatives, we have seen a natural conversion to a pay user increase. In the first quarter, NPUs in live broadcasting increased by 60% year-over-year. As for our premium membership, by the end of the first quarter, we had 20.1 million premium members, a 25% increase year-over-year. Nearly 80% of these were annual or auto-renew package subscribers, representing their strong trust in us. In 2022, we will continue to add exciting content to attract members, including a series of Bilibili-produced Chinese anime, variety shows, and documentaries. Looking at our advertising services, revenues from this segment were RMB 1.0 billion, an increase of 46% year-over-year. In the first quarter, our top five advertising industry verticals were games, skincare and cosmetics, 3C products, automobiles, and food and beverage. In March, the unexpected COVID lockdown caused travel restrictions and logistics difficulties in major cities in China. Some advertising dollars were delayed or placed on hold. Confronting these headwinds, we are pressing forward to expand our advertising scenarios, with more innovative ad products, and increase our ad efficiency with a better conversion toolkit. We launched our Story Mode ad in April, and the initial feedback is encouraging. Compared with the text of feature-based ads, ads in Story Mode have a higher ROI for ad customers and bring an incremental increase to our ad inventory as well as our EGPM. We plan to allocate more resources to improve its performance, including algorithms and product capabilities. E-commerce is another area deeply impacted by the logistics disruption caused by the pandemic. We believe our customer trust is our most valuable asset. We offered our customers our free delivery services and automated refund options. As recovery begins, our main GMV sales are again on the rise. Going forward, we will continue to explore new innovative models to maximize our IP value and achieve synergy with our leading content verticals. Compounding the macro challenges, our action plan is clear for the rest of the year. First, we aim to take all necessary steps to resume normal business operations. Second, we will be focusing on the quality of our users and our revenue growth, particularly DAU metrics and our business segment margins. Lastly, we will take essential action to further control our costs and expenses. This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the first quarter of 2022 and the outlook for the second quarter of 2022. Total net revenue for the first quarter was RMB 5.05 billion, up 30% from the same period of 2021. Cost of revenues increased by 43% year-over-year to RMB 4.2 billion. Server and bandwidth cost as part of the related fixed cost component decreased 2% quarter-over-quarter. Server and bandwidth cost per video view decreased 27% quarter-over-quarter, showing our ongoing efforts and progress in cost-saving. Our gross profit in the first quarter was RMB 807.2 million, and gross margin was 16%. Total operating expenses were RMB 2.8 billion, up 42% from the same period in 2021, which represents a 9% quarter-over-quarter decrease from Q4 2021. Sales and marketing expenses were RMB 1.3 billion, representing a 25% increase year-over-year and a RMB 507.7 million decrease quarter-over-quarter. Selling and marketing expenses as a percentage of total revenue was 25%, down from 30% in the previous quarter. G&A expenses were RMB 535.3 million, representing a 38% increase year-over-year and remaining flat quarter-over-quarter. R&D expenses were RMB 1.0 billion, representing a 74% increase year-over-year. The increase was primarily due to increased headcount in research and development and share-based compensation expenses. We will closely monitor the progress of our investments and make ongoing adjustments when necessary. Net loss was RMB 2.3 billion for the first quarter of 2022, compared with a net loss of RMB 904.9 million in the same period of 2021. Adjusted net loss, which is a non-GAAP measure, was RMB 1.65 billion compared to RMB 891.0 million in the same period of 2021. Basic and diluted net loss per share for the first quarter was RMB 5.80, compared with RMB 2.54 in the same period of 2021. Adjusted basic diluted net loss per share was RMB 4.20, compared with RMB 2.50 in Q1 2021. Turning to our capital allocation and the liability measurement, we announced our US$500 million share repurchase program in early March. As of March 31, 2022, approximately 1.4 million ADS have been purchased under this program for a total cost of US$30 million. We are also optimizing our liability level. In Q1, the company repurchased and canceled an aggregate principal amount of US$204 million of convertible senior notes with a total cash consideration of US$147.9 million and recorded cash savings of RMB 338.8 million. As of March 31, 2022, we had cash and cash equivalents, term deposits, and short-term investments of RMB 24.7 billion. As for our intent to convert to a primary listing on the main board of the Hong Kong Stock Exchange and NASDAQ, the Hong Kong Exchange has acknowledged our application, setting October 3, 2022, as the proposed effective date for our conversion to primary listing. It will expand our access to a wider investor base while we expect to maintain our listing status on NASDAQ. With that in mind, we are currently projecting net revenue for the second quarter of 2022 to be between RMB 4.85 billion and RMB 4.95 billion. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Our first question comes from Lei Zhang with Bank of America. Your line is open.

Thanks management for taking my question. My question is mainly about the COVID lockdown impact on our business in the first half? And then how should we look at our second half user trend and the overall business outlook post the lockdown? Thank you.

Well, I believe the pandemic is one of the questions that most people cared about for the first half of this year. It indeed has had a severe impact on the macro economy and people's everyday lives, especially in Shanghai as one of the cities that were particularly impacted. Taking visibility, for example, over 8,000 of our Shanghai employees have been working from home since March 14th, and we are just now starting to gradually return to the office this week. Until June 13th, all the employees will be fully back to work. This is a total of three full months. You can imagine how it affects everyday life in Shanghai. And how do we see the impact of COVID on visibility? Indeed, it has had short-term impacts on our business, particularly for advertising and e-commerce. However, we do not think there is any impact on Bilibili's long-term growth. For example, for our advertising business, there are some short-term impacts. For example, in many cities in China in the first half of this year, people were in some sort of lockdown or stay-at-home mode, leading many advertisers to put their advertising plans on hold or delay their advertising dollars. And that's the effect. As for Bilibili's e-commerce business, starting from March, especially in April and May, there was a lot of logistics disruption due to the lockdowns or stay-at-home measures across various cities in China, impacting people's willingness to purchase as well as delivery services. So, we do expect this impact will continue in the second quarter. However, all this impact on our app business and e-commerce business, we do think it's temporary. Especially after June, when we reach certain milestones in combating the COVID situation, much of the impact will start to mitigate and disappear. As for Bilibili's fundamentals, we don't think there's any impact brought by the pandemic. Visualization is an unstoppable trend. We see the young generation's needs for entertainment and cultural products are still very strong. Their consumption of culture-related products has become even stronger. So that's why we do not think that there's any impact on our fundamentals. Looking at the specific user metrics, for example, in Q1, our MAU grew 31% year-on-year, and DAU grew 32% year-on-year. Both of those metrics are accelerating compared to Q1 last year. Regarding the quality of our user growth for this quarter, our DAU growth rate outpaced the MAU growth rate, and the growth rate of our paying users outpaced the DAU growth rate, achieving a record high paying ratio of 9.3%. We have not only experienced a very fast user growth rate, but the quality of those users is also very strong. All of this is accomplished without increasing any of our sales and marketing budget. Bilibili operates with a typical Internet platform business model; whether it's DAU or paying ratio on this record high time spent of 95 minutes, and the engagement level grew 87% year-on-year. All those metrics can translate to commercialization. That's why we think COVID has no long-term impact on Bilibili. As for the outlook for the second half of this year, for Q2, there's still some lingering impact, and perhaps the impact in Q2 is even greater than Q1. However, since June this year, we see a sudden change in the environment, with different cities in the country starting to recover from the lockdowns. That's why we believe for the second half of this year, things will start to recover. We have been delivering on our user growth target step-by-step and are also paying more attention to the quality of the users, while closely monitoring the expenses we spend on top-line marketing. As for the business side, as I mentioned, June is the month we start to walk out of the COVID impact, and we also believe this is the time we will start to pick up our growth rate for each of our business lines.

Our next question comes from Yiwen Zhang with China Renaissance. Your line is open.

Thanks for taking my question. My question is regarding Story Mode. So can I share more color and the latest update, such as what role it plays in our broader content ecosystem? And what's the progress on the commercialization ratio around that?

Indeed, since we released the earnings, a lot of people have been asking about the progress of Story Mode because its total video views now contribute more than 20% of our total video views. This is a very tangible new format of content that's playing a bigger role. First of all, I have three points I would like to emphasize on Story Mode. First of all, it is a purely incremental traffic source for Bilibili. It's not like the Story Mode traffic is replacing some of the old PUGV traffic. While users are watching more PUGVs, they are watching even more Story Mode. From a statistical perspective, our video views have grown 84% year-on-year, and Story Mode is contributing over 20% of the total traffic. If we exclude the Story Mode contribution, the PUGV rate growth is still around 50% to 60%, which is similar to the rate we have maintained in the past. That means Story Mode is purely an incremental addition to our visibility ecosystem. As for the Story Mode, the vertical short-form video format is not something new. In fact, we have had this type of content for two to three years. The most important thing in our daily operation is to ensure this type of content is adding incremental traffic instead of replacing old traffic. The results have shown we have done a very good job. Why have we been able to build an incremental traffic growth from Story Mode? Because we view Story Mode as a uniquely Bilibili flavored type of content. If we look at the Story Mode's video creators, many of them are our current content creators. The consumers of the Story Mode are Bilibili's existing users, who consume this type of content during their fragmented time in a more light scenario. We believe that Story Mode is a comprehensive product that supplements our original PUGV content, and it is actually expanding a new consumption scenario for our users. For our content creators who are very good at making long-form videos, it is quite easy for them to create shorter vertical format content. It's like asking you whether you want to post a Weibo post; it's very difficult to ask a Weibo user to write a long article. Asking our content creators to make shorter vertical format content actually helps us increase video submission and also helps our users expand their video consumption scenarios, making them more active and engaged on our platform. It's a win-win situation for us. Lastly, I want to emphasize that Bilibili is not a tool-type of product. It's easy for people to see some Internet platforms or products as tools. This particular product is for playing long-form videos; this is a product for short video players; this is a platform for live broadcasting. However, Bilibili encompasses it all. Instead of being a tool, Bilibili is a content and community platform that gathers people. For industry players, we used to separate users by their product needs. However, from a user perspective, they choose products by content verticals, not by industry categories. For example, a game lover will not only watch PUGV but also watch game-related live broadcasts. He or she might also play Bilibili-produced or licensed games. Knowledge sector users might both consume knowledge-related PUGV and also watch documentaries on Bilibili. As for Story Mode, there is massive content supply on the platform related to lifestyle, food, pets, and those content categories are actually narrowing the PUGV category on Bilibili. Many years ago when Bilibili started its live broadcasting business, people asked if we wanted to compete with certain live broadcasting platforms. My answer has always been that this is expanding our users' needs and our content offerings. As for Story Mode, we're not competing with the short-form video platforms out there, we're actually satisfying our users' existing needs and expanding their content consumption scenarios. Rest assured, the launch of Story Mode will not change how the Bilibili ecosystem works. It will actually become a new highlight of the Bilibili ecosystem, similar to how live broadcasting became an essential element embedded within our ecosystem in the past. I believe the same thing will happen with Story Mode. Bilibili will not simply become a short video platform; it will be part of our ecosystem that serves users’ different needs and expands our content offerings, bringing in incremental traffic. We believe that in the near future, we will have more high-quality mid to long-form videos as well as high-quality short-form videos on Bilibili.

Our next question comes from Alex Yao with JPMorgan. Your line is open.

I would like to ask some questions on advertising. Fundamentally, we agree with Mr. Chen that the long-term determinants of advertising monetization include: number one, total platform usage; number two, user demographics; and number three, the ad tech number, which has nothing to do with the short-term COVID impact. However, as the investment community, we like to understand the near-term trends in our advertising, including what advertiser categories are more vulnerable to the COVID impact, and what categories are more resilient. Similarly, which advertising formats are more resilient and which are more vulnerable? Now that Shanghai has reopened, how do we see the advertising revenue growth rate into the next couple of quarters? Thank you.

Thank you, Alex. I think you’ve captured the essential advantage of Bilibili's advertising business. As you said, due to the macroeconomic slowdown and the pandemic impact, many advertisers' budgets were delayed or placed on hold in the first half. However, this situation is also causing the advertising market to reflect various reasons to invest in advertising. We believe that our platform has high user value and the ability to influence users' mindsets. We’ve also continued to invest in technology that improves our conversion rates; therefore, we believe that in the long term, Bilibili will be increasingly favored by advertisers. The average age of a Bilibili user is 23.5 years old, and 86% of our users are below 35 years old. More than half of our users are from first and second-tier cities, each of which metrics represent the main cohort driving all kinds of consumption in China. By mastering this population, we have become the platform that all advertisers crave. If you look at the past two to three years, our ad load has stayed at 5%. We haven't increased any of our ad loads, and our advertising has maintained a relatively higher growth rate throughout the last two to three years, which is evidence that advertisers highly value Bilibili's users and the Bilibili brand. Even though ad dollars in the market might reduce in the short term, we remain optimistic about Bilibili's long-term advertising growth. As for industry verticals, especially resilient in the first quarter, games, 3C products, food & beverage, and skincare & cosmetics have been particularly strong, especially in games and automotive. In the first quarter, without any game approvals being issued, we delivered better-than-expected game advertising dollar increase. For automotive, because Bilibili's user base is growing with the platform, their consumption power is also growing, which has been captured by many automotive advertisers, leading them to spend more advertising dollars to attract Bilibili users. Confronting the macro uncertainties and short-term fluctuations, we will be focusing on doing the right things for the long term. We will be focusing on developing more standardized and industrialized integrating marketing abilities, which will be our long-term growth engine. Relying on the rapid iteration of our product capabilities and data capabilities, we will continue to strengthen the construction of our middle platform for commercialization. Among the ad customers who invested in Q1, 74% of them bought across different products and various ad products. A customer who purchased an integrated marketing campaign, namely brand performance and native apps, also grew significantly year-over-year. On top of what we get in this area, we’re also expanding our ad scenarios, integrating multiple products and multiple scenarios including PC, mobile apps, iPass, Smart TV, as well as PUGV, OGV live broadcasting, and moment pages, ensuring that whenever the users are, our advertisers can reach them. In Q1, the total MAU for Smart TV devices reached over 50 million. For those TV users, it serves as a good addition to our existing user base. A lot of them are from third and fourth-tier cities, and their time spent has been very good. We will continue to invest in Smart TV and help us convert more living room and family scenarios. We aim to further enhance this multi-terminal integration to optimize our marketing solutions. On top of that, we will further expand and invest in the Story Mode commercialization initiatives. From our initial data for Story Mode, advertising eCPM is significantly higher compared to our traditional advertising scenarios, and its conversion rate is also improving. So in the future, we will focus on what we are good at and add more scenarios, while continuing to invest in the Story Mode commercialization. Further leveraging our content creators' creativity, we will launch more ad products that fit within the Bilibili ecosystem. Now, more than 24,000 content creators and more than 6,500 advertisers have joined our Sparkle app platform. We believe this number will double this year. The Sparkle app platform is one of the advantageous aspects of Bilibili advertising; it essentially serves as a reservoir for advertisers. Creative ideas from our content creators will help us retain existing advertisers and encourage them to stay within our ecosystem. For the second half of this year, we aim to expedite connecting native ads with the more standardized ad products. For example, in the first quarter, more than 40% of our ad customers purchased other standardized products to pair with their Sparkle orders. Lastly, we aim to combine industry trends with our ecosystem advantages, riding on the wave of visualization trends and leveraging the power of our content ecosystem. We have achieved healthy and quality user growth and have discovered that video-based apps have much better conversion rates than traditional ones. Over 65% of our performance app's revenue came from video-based apps, and our eCPM has grown significantly year-over-year in the quarter. The Story Mode, on the other hand, also serves as a significant incremental traffic source and revenue growth for our advertising business. Looking ahead to the second half of the year, we will continue to do the right things and invest for the future, and the results will speak for themselves.

Our next question comes from Alex Poon with Morgan Stanley. Your line is open.

Thanks management for taking my question. My question is related to the live streaming business. Regarding recent regulations, can management share with us the impact of these regulations? And what are our expectations for the development of this sector in the future? Thank you.

So, regarding the recent regulatory updates, it actually has had no impact on Bilibili's live broadcasting business, and our full-year target for the live broadcasting business remains unchanged. We’ve always mentioned that live broadcasting serves a very important part of our ecosystem. It’s a natural extension of our video platform. Our growth will not rely on attracting outside live broadcasters to the platform or attracting outside users to Bilibili's live broadcasting. In fact, there is a very strong overlap between live broadcasters and content creators, as well as between video users and live broadcasting users. Therefore, I maintain confidence in the long-term sustainable growth of live broadcasting.

Our next question comes from Xueqing Zhang with CICC. Your line is open.

Thanks for taking my question. I would like to ask questions related to gross margin and cost control amidst the ongoing COVID-19 pandemic. Firstly, with the latest strategic focus, we've placed higher priority on gross margin improvement and cost control. We proposed a target to achieve a breakeven point on a non-GAAP basis by 2024 in last quarter's earnings call. Is there any change to that target, and how do you balance it with user growth? Lastly, what is the trend for gross margin in the second quarter and the second half of the year? I would appreciate if you could share more color on the segment gross margin trend. Thank you.

So the target of achieving non-GAAP operating breakeven by 2024 remains unchanged. As I mentioned, the COVID impact on Bilibili is short-term and temporary. It doesn't hurt our fundamentals or our long-term target. The margin pressure you see in the first quarter is mainly due to COVID, which resulted in a slowdown in our revenue growth. If you look at the expense side, we're actually not spending more money. You asked about the relationship between user growth and expense control. Bilibili's user growth model has never been purely driven by sales and marketing expenses; rather, it’s driven by our content ecosystem and the intrinsic nature of good content. This quality content inherently attracts user growth. The expense we spend on sell-side marketing only helps people quickly realize there’s a very good platform called Bilibili. Therefore, it’s never been solely about spending on sales and marketing to drive user growth. As a matter of fact, our users' engagement level and retention level have remained healthy. In the future, we will pay more attention to sales and marketing ROI. But I assure you that these efforts will not impact our user growth trend or retention rate. The question of whether we would prioritize expense control over everything else is relevant, as I've mentioned in the last earnings call. Starting from 2022, we are facing many macro changes domestically and internationally, especially due to the impact of COVID. The macro challenges we are facing are not purely due to COVID. Thus, controlling costs and improving efficiency is the most important job for Bilibili and the industry. Regarding specific action points, we want to strategically focus on going deep within our business rather than broadening unnecessarily. This emphasis on cost control and efficiency improvement is pertinent for both Bilibili and industry players. With regard to gross margin, the margin pressure we faced in the first quarter was mainly due to the COVID impact, which slowed our revenue growth. As COVID begins to ease in the second half of this year, we expect our revenue growth rate will return to a normal trajectory, and our gross margin level will improve accordingly.

Yeah. I just want to add a few points. First of all, when we talk about breakeven, everyone prioritizes cost control and efficiency improvement. However, we believe it is equally important for Bilibili to also expand our top line. We still see potential for improving our monetization efficiency, aiming to improve our paying ratio and expand our ad market share to enhance our segment margin throughout the second half of this year. Even in the first quarter, we noticed improvement in the gross profit margin for both our live broadcasting and advertising segments quarter-over-quarter. That trend will continue throughout the remainder of this year. On the cost control front, we have made some progress in Q1; however, the second quarter will also see some pandemic effects, so the results of cost control will reflect more in the second half of this year. There are highlights in our numbers: for example, our selling and marketing expenses decreased by 29% quarter-over-quarter, remaining flat at 25% of total revenue compared to 30% last quarter. Server and bandwidth costs decreased by 2% quarter-over-quarter, while our total user traffic grew by approximately 28% quarter-over-quarter. As for R&D expenses, we primarily invest in game development, data, ad efficiency, and product-related capabilities. We believe it’s essential to improve our productivity and monetization efficiency, but we also consider it important to invest in the future, keeping an eye on the ROI of those investment decisions. We expect that selling and marketing expenses, G&A, and R&D as a percentage of total revenue will gradually decline by Q3 as our top line expands, subsequently narrowing the loss margin naturally. For Q2, we expect the overall spending to remain flat quarter-over-quarter. That will be our outlook for the margin side. Yes, that’s all.

And that concludes the question-and-answer session. I would like to turn the conference call back over to management for additional or closing comments.

Thank you once again for joining us today. If you have further questions, please contact me, Juliet Yang, Bilibili's Executive IR Director, or TPG Investor Relations. Our contact information for IR in both China and the US can be found on today's press release. Have a great day. Bye-bye.

This concludes the program. You may now disconnect.