Bilibili Inc. Q3 FY2022 Earnings Call

Good day and welcome to the Bilibili Third Quarter 2022 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 will discuss 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 filings 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 our 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. 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. Sam Fan, Chief Financial Officer. I will 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 third quarter 2022 results conference call. I am pleased to deliver today’s opening remarks on behalf of Mr. Chen. Our community, which is the foundation of our business and key to our long-term success, continues to expand. In the third quarter, DAUs reached more than 90 million and MAUs nearly 333 million, both up 25% year-over-year. Average daily time spent per user was 96 minutes in the third quarter, up 8 minutes from the same period last year. With that, the total time spent on Bilibili grew by 37% year-over-year. Having said that, we still face macro headwinds and uncertainties that are prevalent throughout the industry. To cope with the challenging environment, we have reprioritized our goals and shifted our focus to two key topics that will help us turn the corner. First, our users and our MAUs have reached a sizable base of nearly 333 million. We believe it's time to shift our primary focus to DAU growth. DAUs not only represent the quality and sustainability of our community but are also directly linked to our inferential power as a platform, as well as various commercial prospects, particularly in terms of revenue generation for our advertising and VAS business. With our improving product offerings and refined algorithms, we can continue to grow our DAU base and improve our DAU to MAU ratio with reduced sales and marketing spending. Second, we are committed to improving our financials by expanding our gross margin and narrowing our losses. After a challenging first half of the year, revenues in the third quarter grew to RMB5.8 billion, up 18% quarter-over-quarter and 11% year-over-year. In the third quarter, we continued to take various actions to tighten our spending. Gross margin improved to 18%, up 3 percentage points sequentially. Sales and marketing expenses as a percentage of total revenues were 21%, down 3 percentage points sequentially. Our non-GAAP net loss ratio narrowed by 10 percentage points compared with the prior quarter. Looking ahead, we will implement a number of additional cost-control measures and further rationalize our marketing expenses and headcount planning. Specifically, we are streamlining our investment in R&D and cutting down on projects with a lower chance of success while being extra mindful when exploring new opportunities. At the same time, we are centralizing our resources in areas related to improving commercialization efficiency and user experience. These adjustments will be completed by the end of this year. Accordingly, we expect our sales, marketing, and R&D expenses to peak this year and start to decline in 2023, with net loss narrowing further accordingly. With that, I’d like to provide a brief update on our core pillars of content, community, and commercialization. Starting with content, over the years, the young generations on Bilibili have grown up and entered new stages of life, their interests evolving, driving greater passion as well as an expansion of our content categories. So, on top of our traditionally strong content verticals, we have seen emerging categories such as automobile, home decoration, interior design, and baby and maternity. In the third quarter, 3.8 million monthly active content creators on Bilibili readily accommodated these varied needs, creating nearly 15 million new videos on a monthly basis, up 14% and 54% year-over-year respectively. The expanding content library drives the overall traffic growth on our platform. Total video views grew by 64% year-over-year, driven by both PUGV and Story Mode content, which grew by 34% and over 470% year-over-year respectively. Particularly with improving content distribution capabilities of Story Mode, content creators can build their fan base more easily, sharing their content across other contract spreads on Bilibili. The various monetization processes we have cultivated for content creators continue to offer more opportunities for them to earn money while doing what they love. In the third quarter, over 1.2 million content creators gained income through multiple channels on Bilibili, up 74% year-over-year. Looking at our community, we consistently deepen our user engagement with our featured and diverse content. As I mentioned earlier, the average daily user time spent reached a record high of 96 minutes, up 8 minutes from the same period last year. Our monthly interactions also increased 41% year-over-year to 14.4 billion. Furthermore, the number of official members on our site was up by 37% year-over-year to 183 million, maintaining a stable 12-month retention rate above 80%. Now, let’s look at our commercialization and the prospects for near and long-term monetization. First, our VAS business. Our VAS revenues reached RMB2.2 billion, up 16% year-over-year in the third quarter. By further integrating live broadcasting with our PUGV ecosystem, we maintain our unique platform advantage. We had 57% more live broadcasting hosts in the third quarter this year compared to the same period last year. The number of live broadcasting paying users increased by 79% year-over-year in the third quarter. The number of premium memberships for the third quarter grew 12% year-over-year to 20.4 million. In December, we plan to launch our self-produced Chinese anime title, The Three-Body Problem. This highly anticipated title is expected to attract a wide range of sci-fi lovers to our platform. Looking at our advertising, despite the softness in the macro environment, net revenues were RMB1.4 billion, an increase of 16% year-over-year. We further strengthened our integrated marketing campaign offerings by combining diverse ad products and conversion modules across different video viewing scenarios. Story Mode ads as part of our ad offerings continue to capture more performance-based ad dollars in the third quarter. Our top advertising verticals in the third quarter were digital products and home appliances, skincare and cosmetics, automotive, and food and beverage. For games, our game revenues grew 6% year-over-year to RMB1.5 billion, largely driven by the new titles we launched in the domestic and overseas markets in the third quarter. Developing in-house and distributing globally remains our core game strategy, which has started to bear fruit. Revenue generated from self-developed games contributed 9% of our total game revenue in the third quarter. Looking at our pipeline, we have two games approved for domestic release this year and earlier next year, including one self-development title. Five titles are slated to launch in overseas markets early next year. Facing the market’s macro uncertainties, our primary goal is clear: improving our gross profit margin and narrowing our net loss. By expediting our commercialization, we believe our top line can catch up with our community scale. While we remain committed to a goal of reaching non-GAAP operating breakeven by 2024, we will also actively manage our cash position and liabilities. We believe we can weather through the macro uncertainties and emerge as a stronger, more efficient, and more resilient company. This concludes Mr. Chen’s remarks. I will now provide a brief overview of our financial results for the third quarter of 2022 and the outlook for the fourth quarter of 2022. Total net revenues for the quarter were RMB5.8 billion, up 11% from the same period of 2021. Our total net revenue breakdown by revenue stream was approximately 25% mobile games, 38% VAS, 23% advertising, and 14% from e-commerce and other business. Cost of revenues increased by 13% year-over-year to RMB4.7 billion. Our gross profit in the third quarter was RMB1.1 billion and our gross margin was 18.2%. Gross margin recovered by 3.2 percentage points sequentially, attributable to the top line growth. We expect to show continued sequential quarterly improvements in the first quarter and the coming year. Total operating expenses were RMB2.9 billion, flattish compared with the same period of 2021. We cut sales and marketing expenses by 25% year-over-year to RMB1.2 billion. Sales and marketing expenses as a percentage of total revenues were also down to 21%, compared with 31% in the same period last year. G&A expenses were RMB543.4 million, up 14% year-over-year. The increase was primarily due to increased headcount in G&A personnel and higher rental expenses. R&D expenses were RMB1.1 billion, representing a 43% increase year-over-year. The increase was primarily due to increased headcount in R&D and increased share-based compensation expenses. Net loss and adjusted net loss were RMB1.7 billion and RMB1.8 billion for the third quarter of 2022, respectively. We successfully narrowed our adjusted net loss ratio by 10 percentage points sequentially in Q3, and we expect the narrowing trend will continue in the fourth quarter and coming years. Turning to our capital allocation and liability management, we currently have three outstanding convertible bonds totaling $2.5 billion, among which the full face value of $746 million is redeemable in June 2023, $429 million is redeemable in April 2024, and $1.3 billion is redeemable in December 2024. As of September 30, 2022, we had cash and cash equivalents, term deposits, and short-term investments of RMB23.9 billion or $3.4 billion. We believe this level of liquidity is sufficient to repay the aggregate balance of all outstanding convertible bonds by their respective maturity without considering any external funding resources available to us. Meanwhile, we are taking further actions to narrow our losses and reach breakeven. We will be prudent with our CapEx and closely monitor our cash outflow. Additionally, these convertible bonds are currently traded at a discounted price, and we will continue to evaluate the option to repurchase and retail them at a reasonable price. As of October 31, 2022, we had repurchased and retailed a total principal amount of $329 million of these notes for a total cash consideration of $247 million, generating an $82 million net cash position. We will stay opportunistic while continuously evaluating options for the best use of our capital. Finally, our conversion from a secondary to a primary listing on the Hong Kong Stock Exchange becomes effective on October 3, 2022. Bilibili is now a newly listed company in Hong Kong and the United States. This conversion will further expand our investor base and provide more liquidity for our securities in the capital markets. With that in mind, we are currently projecting net revenues for the fourth quarter of 2022 to be between RMB6.0 billion and RMB6.2 billion. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Thank you. Your first question is from Daniel Chen from JPMorgan. Please proceed.

I will translate myself. So in the previous prepared remarks, management mentioned that the user growth focus will switch to daily active users, DAU. Could you maybe elaborate more about our future user growth strategy? Thank you.

We raised the MA centered around MAU strategy back in 2019. In the past, we have successfully expanded our MAU from 110 million to 330 million, and this is quite successful, showing our excellent execution in the past few years. If we were able to grow 3 times in the past few years, this supports the thesis that Bilibili's business model, which combines community and content ecosystem, works and is quite successful. This demonstrates our ability to maintain a high-quality, highly sticky community while delivering impressive user growth. Based on our 2022 work progress, we still see a lot of room for our MAU growth. Even in Q3, we delivered a 25% year-on-year growth. If we carry on with the current strategy, we believe we can still achieve the 400 million MAU target by next year. Starting from 2022, we have also devoted a lot of effort to DAU growth, because we believe that DAU, compared to MAU, can present the quality of user growth as well as the sustainability of user growth. Additionally, it is directly linked to the commercial perspective of our community. Growth itself is not the end goal; it's a method to enhance the quality of our users. Ultimately, the increase in MAU will directly affect the growth of DAU. That’s why, starting from this year, we are allocating more emphasis and resources to increase our DAU. If you look at our DAU-MAU ratio, it has already improved from 26% in 2021 to 27% in 2022. As you may be aware, we are facing multiple challenges from the macro environment, with profitability being a key priority for management. We believe that increasing DAU will help improve monetization efficiency, grow revenue, reduce sales and marketing expenses, and achieve breakeven as soon as possible. We are very confident about DAU growth next year, and believe this will be more sustainable for the core company as well as very beneficial to our commercialization efforts. For the outlook for next year, we hope to increase our DAU to MAU ratio to 30%. Starting from 2022, we have already taken actions to control our sales and marketing expenses. In Q3 this year, our sales and marketing expenses already declined 25% year-over-year. As we shift our focus from MAU to DAU, we expect we can further reduce our sales and marketing expenses, with the decline being even greater in 2023 compared to 2022.

Thank you. We will now take our next question. This is from the line of Lei Zhang from Bank of America. Please go ahead.

Thanks, management for taking our question. My question is mainly on profitability. I noticed that our operating loss narrowed in the third quarter. So how should we look at our gross margin and operating margin trends, and what costs do we see room to control? Any changes to our breakeven target? Thank you.

We have raised the target to reach breakeven by the end of 2024, and we will stick to that mission and goal. As we move through 2022, obviously, there have been multiple challenges arising from the macro environment. Reducing loss and prioritizing profitability is the company's top priority. I am personally taking charge of this effort. We have already implemented actions to reduce our costs and expenses. So far, the unit cost for our server and bandwidth continues to decline. As I mentioned earlier, sales and marketing expenses have continued to decline year-on-year for three consecutive quarters. Moving forward, we will exert more effort to reduce sales and marketing expenses, as well as G&A and R&D expenses. In terms of efficiency improvement, I aim to reduce investment in non-core businesses and centrally allocate resources to improve commercialization efficiencies. At the same time, we will optimize our organizational structure to reduce inefficiencies and increase effectiveness. We expect these adjustments will be complete by the end of this year, and we’ll start showing on the P&L from the first quarter next year.

I will address the question regarding gross margin and expense trends. The company has taken extensive actions to reduce costs and prioritize profitability. We expect our gross margin to gradually increase going forward. Sales and marketing expenses in 2022 have already declined year-over-year, as mentioned by our Chairman, and they will continue to decline next year. We anticipate R&D expenses, which will peak in Q4 this year, to start declining next year. In 2023 and beyond, we expect overall operating expenses in absolute dollar terms to decline year-over-year, and net loss will further narrow until we reach our breakeven target. At the same time, we will pay close attention to our cash flow and tightly control CapEx and investments as we work to reduce our losses. We aim to maintain a healthy cash balance.

Thank you, operator. We can take the next question.

Thank you. Next question is from the line of Xueqing Zhang from CICC. Please go ahead.

My question is regarding advertising, considering the impact of COVID-19 and the weak macro environment, what’s your strategy for the advertising business and how should we think about revenue growth in the first quarter and next year? In addition, during Double 11, we noticed that Bilibili has advertising products related to content e-commerce. Could management share more details about it? I also want to know if Bilibili is considering launching Tojo at present. Thank you.

Despite the weakened macro environment, advertising revenue in the third quarter reached RMB1.35 billion, an increase of 16% year-over-year. We consider this a job well done, especially since the ad revenue from performance-related formats increased by over 20% year-over-year, and we have continued to gain market share in the ad market. In 2023, we plan to continue enhancing our integrated marketing capabilities and to build a friendly and welcoming environment for advertisers. We will help advertisers effectively reach our young generation through Bilibili’s multiple products and various scenarios, aiding them in building their brand equity. We intend to further combine our content ecosystem with our ad business, particularly in our core verticals, increasing ad inventory and accelerating ad momentum in consumption and transaction scenarios. For instance, we are already among the top five market players in verticals like gaming, 3C, and digital products. Another example would be the FMCG ads, which are necessities for the young generation. This sector continues to grow, including food and beverage, skincare, and cosmetics. As we move forward, we expect verticals like automotive, baby and maternity, and home decor and appliances to have great potential, especially as the young generation continues to grow with Bilibili as they enter different life stages. In Q3, the automotive sector grew over 80% year-over-year within Bilibili. You mentioned content e-commerce; I would define this as an important infrastructure for our ecosystem, essential for commercialization. In 2023, we plan to further connect the transaction scenario with the Bilibili community and the advertising business. For example, in the past two quarters, we have begun exploring the transitory consumption and transaction model together with major brand advertisers. During this year’s Double 11, despite the weakened macro environment, we still achieved 47% year-on-year growth in advertising revenue, with performance-based formats growing over 80%. We are looking to expand and be open regarding transaction and consumption scenarios, welcoming more brand advertisers to explore the commercial value within our unique ecosystem. As for pre-roll advertising, which takes only 3% to 5% of the overall advertising market in China and is declining rapidly, we believe some might be overly optimistic about the potential for pre-roll advertising on Bilibili. Given that most content on our platform is about 2 to 5 minutes long, adding pre-rolls would generate limited income but could disrupt the user experience. Thus, we are cautious about pursuing this format. We are exploring ads that are more adaptive to Bilibili’s ecosystem, such as metaverse ads, bullet-chat ads, and other innovative formats within our player frame. Additionally, we aim to combine performance-based ads with app download conversion modules and CPS, termed the game partner model. Another example includes Story Mode ads, which we believe are an excellent format for carrying out performance-based advertising. As Story Mode traffic continues to grow, it will open up more ad inventory for us. Ultimately, we are confident that our ad business will continue to outperform the overall industry in 2022 and 2023 and that we will gain further market share.

Operator, next question, please.

Thank you. We will now take our next question. Please standby. This is from the line of Lincoln Kong from Goldman Sachs. Please go ahead.

So, my question is about the gaming business. Given that Mr. Chen, you have personally taken control of the gaming business, what’s our strategy and targets and change posture taking over? After the reduction of the gaming portfolio, how is the company looking at overall gaming business growth outlook, especially of our sales buildup games as well as the overseas gaming strategy and progress? Thank you.

I raised the strategy of putting video and gaming at Bilibili’s core business back in 2019. In fact, Bilibili has been exploring the game business from early on. We are the platform with the most concentrated gamers in China, and we have a lot of content offerings in terms of live broadcasting and video on our platform. Additionally, the areas we invested in, such as animation and comics, have great synergies with our game business. Thus, integrating gaming into our core strategy was a natural step. In the past two years, the game business hasn’t performed as well as we planned, mainly due to the slower-than-expected progress of self-developed games. This stemmed from exploring multiple directions with different teams, which ultimately diluted our focus. Now that I am personally overseeing the gaming business, we are not changing our original strategy. Rather, we will diligently pursue it, focusing on developing high-quality games in-house while distributing globally. My intention is to concentrate our best resources on one or two directions to meet the highest industry standards. I will also strengthen the lifecycle management of our self-developed projects to ensure increased investment in projects with potential and promptly discontinue projects that do not meet expectations. Moving forward, my requirement for the gaming business will be straightforward: to produce the best products and enhance the business. Given our strong environment in game content, I am confident that whether it pertains to self-developed or licensed games, we can achieve sustainable growth in this sector.

Operator, next question please.

Thank you. We will now take our next question. Please standby. This is from the line of Yiwen Zhang from China Renaissance. Please go ahead.

My question is regarding live broadcasting. So, the integration between the live broadcasting and media streaming has been ongoing for a while. Can you share more details on the strategy and discuss our expectations for the live streaming business? Thank you.

We believe the live broadcasting business has met our expectations this year. In the first three quarters of this year, our live broadcasting revenue grew by 30% year-over-year, and the gross margin for live broadcasting is starting to recover this year. As I have previously mentioned, we believe live broadcasting serves as a critical capability for the platform. It’s a natural extension of our video content format. Our strategy has always been to integrate the live broadcasting ecosystem with our video ecosystem to generate synergies between these two. From the supply side, we have been exploring within our ecosystem to convert our content creators into hosts and vice versa. In Q3, the number of content creator-hosts increased by 73% year-over-year, which is quite impressive and demonstrates how our strategy is working to enhance content supply. We are also tapping into the demand side to discover users who may be interested in the same vertical content, whether it's video or live broadcasting. In Q3, we saw DAU penetration for live broadcasting continue to increase, with MAU for live broadcasting recording a 79% year-over-year growth. This remarkable growth reflects our strategy’s effectiveness. Last quarter, we merged the live broadcasting operation with PUGV, placing the same team responsible for managing content creators and live hosts under one roof. This structure allows us to align our operations and better serve our user base. Furthermore, for vertical content categories such as V-UP, we have begun opening up video materials for various creators, significantly increasing the frequency of live broadcasts. For the knowledge sector, we previously thought it difficult for knowledge sector creators to monetize through live broadcasting. However, we have witnessed live broadcast hosts achieve significant follower milestones via live Q&A sessions. As our integration of live broadcasting and PUGV deepens, I am confident that both live broadcasting revenue and its gross margin will continue to rise in 2023.

Back to you, operator. I think that’s about time for the Q&A session today.

Thank you. That does conclude the question-and-answer session. So, I would like to turn the conference back over to Juliet Yang for any additional or closing remarks.

Well, thank you once again for joining us today. If you have further questions, please contact me, Juliet Yang, Bilibili Executive IR Director. Our contact information for IR in both China and the U.S. can be found on today’s press release. Have a great day. Bye-bye.

Thank you. This does conclude the conference for today. Thank you for participating, and you may now disconnect.