Bilibili Inc. Q1 FY2023 Earnings Call

Good day, and welcome to the Bilibili First Quarter 2023 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 purpose only. Definitions of these measures and a reconciliation table are available in the news release we issued earlier today. As a reminder, this conference call 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. Sam Fan, Chief Financial Officer. And 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 joining our 2023 first quarter conference call. I'm happy to share today's opening remarks on behalf of Mr. Chen. Our primary goal for 2023 is to enhance our commercialization efficiency and reduce our losses. The results from the first quarter show that we are making solid progress towards these objectives. Firstly, we achieved over 20% year-on-year revenue growth in our advertising business. Our gross margin rose to 22% in the first quarter, up from 16% a year ago, resulting in a 37% year-over-year increase in gross profit. Secondly, we are actively strengthening our expense controls, leading to an 11% reduction in total operating expenses year-over-year in the first quarter. We particularly cut our sales and marketing expenses by 30% year-over-year while still expanding our daily active users. These measures have been effective in improving our bottom line, as we narrowed our net loss by 72% compared to last year. The progress we’ve made gives us confidence that we are on the right path toward achieving our break-even target. While we concentrate on improving our financial metrics, we are also focused on attracting more users and enhancing community engagement. In the first quarter, our daily active users increased by 18% year-over-year to 93.7 million, with our monthly active users reaching 315 million, pushing our engagement ratio up to 29.7% from 27% a year ago. Users continue to appreciate our diverse and evolving content, with the average time spent on Bilibili reaching 96 minutes daily in the first quarter, resulting in a total time spent on our platform increasing by 19% year-over-year. Throughout this year, we will nurture our daily active users in a cost-effective way, streamline our organization, and enhance our overall commercialization efficiency. This strategy allows us to better allocate resources to strengthen our community. Specifically, we are working to expand our creator base and support them in earning more revenue. We will also keep investing in our commercialization capabilities by improving our advertising infrastructure, further integrating live broadcasting and video operations, developing high-quality in-house games, and exploring AI-generated content opportunities in our community. All these efforts will help us build a stronger community and unlock more commercial potential for our platform. With that overview of our progress, I would now like to provide a brief update on our three core focus areas: content, community, and commercialization. Starting with content, our content creators are a crucial part of our ecosystem. We are committed to creating a community that enables them to gain recognition and rewards. By offering more user-friendly editing tools, professional content operations support, and improved traffic distribution mechanisms that favor longer-form and mid-length content creators, we can boost content creation and attract more creators to our platform. In the first quarter, the number of our active content creators rose by 42%, and monthly content submissions increased by 79% year-over-year. Through further integration of our commercial channels within our content ecosystem, we have empowered more creators to realize their economic potential through varied means. Different creators can monetize their skills in areas like advertising, live broadcasting, and online courses. Thanks to our platform and support, over 1.5 million content creators earned income through multiple avenues in the first quarter, marking a 50% increase year-over-year. Notably, the number of creators earning from sources beyond our cash incentive program grew over 55% year-over-year. Moving forward, we will continue to develop additional channels and products to assist our content creators in achieving their commercial value. Our multi-scenario products, like Story Mode, are gaining significant attention and meeting users' diverse video consumption preferences. During the first quarter, our total daily video views climbed 37% to 4.1 billion. Story Mode's daily views surged by 82%, and PUGV views increased by 26% year-over-year. The strong consumption trends in Story Mode continue to create opportunities for growing our daily active users, boosting community engagement, and enhancing our commercialization prospects. Furthermore, we are exploring the incorporation of AI applications into our content ecosystem. Utilizing AI-generated content can improve both the efficiency of content creation and user experience. We see great promise and potential in this area for the video industry. By leveraging emerging technologies, we aim to further enrich our content offerings while making it easier for creators to bring their visions to life. We are also beta testing new features powered by AI-generated content to enhance user experience. Regarding our community, our user base is showing strong engagement. The average daily time spent on Bilibili remains steady at 96 minutes. Monthly interactions grew 15% year-over-year, totaling 14.2 billion. Our core group of official members reached 205 million in the first quarter, evidencing a 29% year-over-year increase. The 12-month retention rate for official members is also around 80%. Our loyal and active community allows us to explore exclusive products and services, creating additional commercial opportunities. Now let’s look at our commercialization efforts, where we are enhancing revenue generation to expand our margins and reduce losses. In the first quarter, total revenues reached RMB5.1 billion. Specifically, revenue from our advertising segment rose 22% year-over-year. We are taking proactive steps to boost our commercialization efficiency, which will support our overall revenue and improve gross margins. Breaking this down further, revenues from our VAS business grew 5% year-over-year to RMB2.2 billion, largely driven by the growth of live broadcasting. We continue integrating our live broadcasting capabilities into our video ecosystem. As more creators turn to live streaming as a monetization method, the number of monthly active live broadcasting hosts grew 34% year-over-year, and the number of paying users for live broadcasts rose 15% year-over-year. We have also improved the gross margin in this sector both sequentially and year-over-year, and we expect this trend to continue. By the end of March, we had 20.2 million premium members, with over 80% subscribing to annual or auto-renew packages, reflecting strong user trust in our brand and content. Turning to our advertising segment, revenues grew 22% year-over-year to RMB1.3 billion in the first quarter, mainly as a result of enhancements in our advertising infrastructure. Over the past year, we have optimized our ad product offerings while continuously expanding our commercial database and refining our ad algorithm to deliver better ROI for our clients. The results are promising, with performance-based ad revenue showing nearly 50% year-on-year growth in the first quarter, and growth in brand ads and native ads as well. The strongest performing advertising sectors for the quarter included gaming, digital products, home appliances, e-commerce, skin care and cosmetics, and automotive. Users are exhibiting increased spending power and varied consumption needs as they transition through different life stages, attracting more advertisers from a wider range of industries to our platform. In our gaming business, revenues for the first quarter totaled RMB1.1 billion as the rate of game approvals begins to stabilize. We anticipate introducing eight new titles in domestic markets in the upcoming quarters, including Cygames’ much-anticipated game Pretty Derby, our first self-developed title in the female romance genre, and our self-developed ACG card game Eruthyll. Additionally, we successfully co-published HonKai: Star Rail in April and Reverse: 1999 in May, showcasing our strong distribution capabilities. Shifting to our IP derivatives and other revenue, which was previously labeled as e-commerce and others, revenues in the first quarter were RMB510 million, down 15% year-over-year. This revenue dip was primarily due to a strategic shift aimed at increasing profitability. However, margins within this segment improved significantly as a result of our approach, and we expect this trend to continue going forward. Lastly, we recently released our 2022 annual ESG report, which highlights the value we deliver to younger generations in China. We are committed to upholding our social responsibilities, fostering a welcoming community for users and creators, and working towards a sustainable future for everyone. In conclusion, our actions are effectively enhancing our financial performance and operational capabilities while we continue to grow our vibrant community. Throughout this year, we will execute our strategy further and continue expanding our gross margin while reducing our losses. This concludes Mr. Chen’s remarks.

Total net revenue for the first quarter was RMB5.1 billion, flat compared with the same period last year. Our total net revenue breakdown by revenue stream was approximately 43% VAS; 25% advertising; 22% mobile games; and 10% from our IP derivatives and others. Our cost of revenue decreased by 7% year-over-year, driving our gross profit to RMB1.1 billion, up 37% year-over-year, while our gross margin was 22%, up from 16% for the same period last year. With our tightly controlled cost structure, we expect to show continued margin improvement throughout 2023. Our total operating expenses were down 11% year-over-year and 31% quarter-over-quarter. We are maintaining tight control of our expenses while we work to increase our commercial prospects. We cut sales and marketing expenses by 30% year-over-year, while our DAUs grew by 18% year-over-year. As a percent of total revenue, sales and marketing was 17%, compared with 25% in the same period last year. G&A expenses were RMB572 million, up 7% year-over-year. R&D expenses were RMB1 billion, representing a 2% increase year-over-year. We expect to continue strict control of our operating expenses going forward. Our net loss and adjusted net loss were RMB630 million and RMB1 billion, narrowing by 72% and 38%, year-over-year, respectively. Our net loss ratio in the first quarter was 12%, narrowed from 45% for the same period a year ago. Turning to our capital allocation and liabilities management. We currently have three outstanding CBs that total US$1.6 billion. Among these, a total principal amount of $746 million of the 2027 CB has upcoming put rights which are exercisable through June of this year. As of March 31, 2023, we had cash and cash equivalents, time deposits and short-term investments of RMB19.4 billion, or US$2.8 billion. We believe this amount is sufficient to cover all our remaining CBs and fund our future operations, including the put rights on our 2027 CBs. With that in mind, we reiterate our expectations for net revenues for the full year of 2023 to be between RMB24 billion and RMB26 billion. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Thank you. Now, we're going to take our first question from Daniel Chan at JPMorgan. Your line is open. Please ask your question.

I will translate myself. I have a question regarding user growth. Despite lower sales and marketing expenses in the first quarter, we experienced sustainable growth in daily active users and a higher ratio of daily active users to monthly active users during this period. Could management provide some insights on the outlook for future user growth and the strategy moving forward? Thank you.

Like I mentioned in previous earnings calls, we have taken a more quality-focused approach to user growth, specifically regarding daily active users (DAU). Currently, one of our main goals is to enhance the efficiency of our commercialization efforts. High-quality DAU growth and user engagement are essential for bolstering commercialization. This strategy requires us to shift our focus from monthly active users (MAU) to DAU. Over the past several quarters, we have successfully reduced sales and marketing expenses while seeing an increase in our DAU. In the first quarter, our sales and marketing expenses dropped by 30%, while our DAU rose by 18% to 93.7 million. DAU is a more accurate measure of user engagement and commercialization potential than MAU. Our strategy will continue to prioritize DAU, and we will use this metric to track our performance, enhance average daily user engagement, and improve the DAU to MAU ratio. Building on a stable MAU, we aim to boost retention and engagement further. In the first quarter, the DAU to MAU ratio grew to 29.7%, with the average daily time spent by users reaching 96 minutes. Looking ahead, we expect this DAU to MAU ratio to continue to rise. I believe that Bilibili's business model creates a virtuous cycle where content creators, the supply of content, and the quality of that content attract high-quality users. The community fosters engagement, encouraging users to stay, which in turn drives momentum for content creators to produce even better content. This positive feedback loop suggests that we will be able to sustain our DAU growth into the future.

Thank you. Now, we're going to take our next question. Please standby. And the next question comes from the line of Yiwen Zhang from China Renaissance. Your line is open. Please ask your question.

My question is about advertising. You achieved a 22% year-over-year growth in ad revenue, which outpaced the industry average. Can you provide more details on how we enhanced our ad products and improved efficiency? What is our perspective on the ads market for 2023? Additionally, what strategy should we implement in this market? Lastly, we have recently seen many e-commerce initiatives in video or live streaming formats. What progress have we made there? Thank you.

In the first quarter, we noticed that the advertising market in China began to recover, with expectations of double-digit growth. At Bilibili, however, our growth for the same period was 22%, which I believe surpasses the industry average, and we successfully gained more market share. Specifically focusing on performance ads, our year-on-year growth was over 50%. As Mr. Chen mentioned, with healthy daily active user growth, we are confident this will positively impact our advertising revenue. Our ad business benefits from both horizontal and vertical enhancements, as well as new opportunities stemming from vibrant transactions within our community. Horizontal improvements refer to enhancing our technical and data capabilities on the middle platform, which boosts ad efficiency. For example, optimizing algorithms can increase the deep conversion rate, which commands a higher effective cost per mille than shallow conversion. In the gaming industry, this ratio has risen to 35%. We aim to increase the supply of commercial traffic while maintaining a good user experience, using the user lifetime value model for dynamic ad load adjustments. Additionally, we have developed a data-driven marketing methodology, the Make model, established in 2022, which helps clients refine advertising plans before purchases and measure outcomes after. This model has been validated in sectors like automotive and fast-moving consumer goods in the first quarter. Moreover, AI-generated content will also enhance ad operations and conversion efficiency. Regarding vertical enhancements, since last year, we have been creating tailored models for six key industries to ensure their ads reach the right users on Bilibili. For instance, in gaming, we have a concentration of highly active, high-value gamers. In the first quarter, over 40% of our mobile users watched game videos or live streams daily. Our teams focused on game content, distribution, and advertising have been collaborating towards common goals, which has led to improved user conversion and branding results. The video views for our latest game, HonKai: Star Rail, in the initial two weeks were 3.7 times those of Genshin Impact in the same period, resulting in higher distribution and ad revenue compared to Genshin Impact during that timeframe. In e-commerce, partnerships with Alibaba, PDD, and JD have significantly boosted ad efficiency, with revenue in the first quarter growing by over 110% year-on-year during the June 18 shopping festival. With a comprehensive marketing strategy, we anticipate our revenue could potentially triple or even quadruple. We are also confident that sectors such as electronics, FMCG, and automotive will continue to experience healthy growth. I view video and live streaming e-commerce as additional growth opportunities for both our ad revenue and content creators’ earnings, driven by lively transactions in our community. Since last year, similar to other content platforms, we have been building closed-loop e-commerce systems while remaining dedicated to creating an open ecosystem connected with all e-commerce sites. Our goal is to encourage users to see Bilibili as a shopping destination and enhance their capability to transact on our platform. The first quarter surpassed our expectations, with over 10 million users placing e-commerce orders on Bilibili daily. We also launched a dual performance product that combines wish listing and transaction functionalities, which constituted about 30% of our performance ads in the first quarter. E-commerce is emerging as a new income stream for content creators, with approximately 50,000 creators engaging in e-commerce sales monthly and a streamlined workflow established for categories like cosmetics, food, and electronics. Looking ahead, we believe the momentum for consumption and transactions will continue to strengthen on Bilibili. That concludes my perspective on the evolution of video and live broadcasting e-commerce on our platform. Next question?

Thank you. Now, we're going to take our next question. Just give us a moment. And the next question comes from the line of Lincoln Kong from Goldman Sachs. Your line is open. Please ask your question.

Thank you to the management for addressing my question. I'm interested in the live streaming business, which has been growing rapidly. How should we approach the future strategy and outlook, particularly regarding the integration of live streaming and on-demand content, as well as the overall gross margin trends for the live streaming sector? Thank you.

We've always maintained that live streaming is a natural extension of our video ecosystem. Operationally, we regard live broadcasting as an essential component of our overall operations. Live broadcasting and videos on Bilibili often cater to similar demographics, resulting in considerable overlap in categories. Many live broadcasters are also video creators. Since last year, we have concentrated on integrating live broadcasting with videos to enhance the live broadcasting business using momentum from the video ecosystem. The success we've seen in live broadcasting is due to our integration efforts. In the first quarter, the number of video creators who also engage in live streaming rose by 38%, and 90% of new live streamers were either average users or video creators. The video ecosystem provides vitality and content for our live streaming business. In the first quarter, active live streamers increased by 34% and the number of monthly paying users grew by 15%. This illustrates how we are leveraging our video ecosystem to empower live streaming. Bilibili offers a wide variety of video content, which has also enriched our live streaming offerings. A significant aspect of this is our VTubers, as Bilibili hosts the largest group of VTubers in China, which serves as a natural progression from our ACG content. Today, VTubers constitute an important revenue source for live streaming and are highly active on our platform. With support from AIGC, they can produce more engaging and dynamic content, enhancing the overall user experience. I remain very optimistic about our prospects. Additionally, Bilibili aims to diversify and cover numerous verticals. Interestingly, legal matters are a popular category on Bilibili, with some lawyers also serving as live streamers, addressing various legal queries from our audience. Another example is golf, where thousands of golfers in China have joined our platform as live streamers, even attracting golf players from Taiwan. These instances highlight the dynamic and diverse nature of live streaming on Bilibili. It is not merely a revenue stream but boasts substantial content that holds great potential. As our video business strengthens, I believe our live streaming operations will also expand and improve. Previously, I've mentioned that the live streaming business could potentially double, and I reiterate that belief during this call. The integration of video and live streaming will further enhance our offerings. Every user can be both a video viewer and a live stream viewer, with each broadcaster capable of generating both video and live streaming content. This has become an essential income source for creators. In the first quarter, 700,000 creators earned income from live streaming. The integration of videos and live streaming has the potential to improve our gross margins and reduce costs, especially as more regular users engage in live streaming, distributing bandwidth costs more efficiently. We anticipate that the gross margin for the live streaming business will continue to improve. Thank you.

Thank you. Now, we're going to take our next question. Just give us a moment. And the next question comes from the line of Lei Zhang from Bank of America Securities. Your line is open. Please ask your question.

Thank you to management for addressing my question. I would like to inquire specifically about the monetization of content creators, which has been a topic of considerable discussion online. Can you provide us with more insight into how we can enhance either the overall income or the commercial value for content creators on Bilibili? Thank you.

I believe you are referring to an article released in April that claims many creators on Bilibili have stopped uploading new content. After reading it myself, I found the article to be misleading. It only mentioned three content creators who paused their video updates, while we have millions of creators on Bilibili. Additionally, two of those three have actually released new content since then. Despite the article’s clickbait title, its content and reasoning are inaccurate. The article sparked a heated debate, indicating that many people are closely monitoring Bilibili, and some media outlets even published derivative reports based on it. This discussion became a trending topic on Weibo. Internally, we have been actively working to enhance commercialization for our content creators, and we have supporting data. In the first quarter alone, 1.5 million content creators earned an income on Bilibili, which represents a 50% increase year-over-year. Their earnings from advertising, live streaming, and user payments have also seen significant growth. Contrary to what the article suggested about cutting incentives for content creation, this is misleading. Our incentive programs apply only to content creators with fewer than 10,000 followers, offering them subsidies to support their initial period of content creation when they are not yet able to earn an income. For those with over 10,000 followers, we focus on providing tools to help them monetize independently. Therefore, the incentive program does not significantly impact the majority of creators on our platform. Supporting our creators in monetization is a top priority. We have established a Sparkle system to help them secure commercial deals and have been empowering video creators to transition to live streaming for additional income. Our efforts to assist them will continue, as we believe that when content creators do not have financial worries, they can focus more on producing high-quality content. The discussion triggered by this article shows that users care deeply about both the creators and the Bilibili platform. Our high concentration of talented creators is a testament to our commitment to the value of high-quality content and the strength of creators. This guiding principle has always influenced our operations. We have consistently supported creators because we understand their needs, and we will continue to strive to help them earn the income they deserve. This is an ongoing commitment for us. Thank you.

Thank you. Now, we're going to take our next question. Just give us a moment. And the next question comes from the line of Xueqing Zhang from CICC. Your line is open. Please ask the question.

Good evening, management. Thank you for taking my question. I would like to ask about the gaming business. You mentioned in the prepared remarks that Bilibili has some approved games. Can management provide details about the gaming pipeline and its outlook? Thank you.

This year is set to be significant for the gaming industry. Licenses for domestic games are now being issued regularly each month. For imported games, two batches of licenses have been released since last year, benefiting not only our game distribution business but also advertising and live broadcasting. Over the next few quarters, we plan to launch 13 games both domestically and internationally. Eight of these have received domestic game licenses and will be released in China, while five will be published overseas. We are currently preparing for the launch of our highly anticipated game, Pretty Derby, and are working diligently to complete the final localization work before its release. Additionally, we have two self-developed titles: Alkaidland Records, a female romance game, and Eruthyll, an ACG card game, which are expected to launch later this summer. Bilibili is the leading platform for ACG gamers and fans and has a young user base, making us a key channel for ACG game distribution. Since the start of the year, we have successfully distributed numerous ACG titles, demonstrating our effectiveness, with HonKai: Star Rail by miHoYo reaching an impressive 2.8 million downloads on its first day, setting a new record for our distribution efforts. Just yesterday, our distributed game Reverse: 1999 was released to positive initial reviews. There is considerable interest in our self-developed games, including Alkaidland Records and Eruthyll, and we have additional games in the pipeline. However, given our commitment to high-quality self-developed games, the development cycle will be lengthy, averaging about three years per game, with the next one likely launching in the year after next. We will continue to focus on producing quality self-developed games and distributing them globally. In terms of game genres, we will concentrate on areas where we excel, such as ACG card games. Our aim is to create top-ranking games in niche categories and manage them effectively over extended life cycles, and we are dedicating significant effort to achieving success in this area. Thank you.

Thank you. Now, we're going to take our last question. Please stand by. And the question comes from the line of Felix Liu from UBS. Your line is open. Please ask your question.

Thank you, management, for addressing my question, and congratulations on the significant improvement in GP margin and overall profitability. Could you provide more details on the measures you have implemented and the factors that will contribute to increasing GP margin and reducing losses in the future? Thank you.

This is Sam. I will address your question. Our focus this year is clear: to enhance the gross margin while also reducing our net loss. In the first quarter, our gross profit grew about 37% year-over-year, and our net loss decreased significantly by about 72% year-over-year and 58% quarter-over-quarter. On the revenue side, we continue to enhance the quality of our revenue. As we mentioned, our advertising business grew by 22% year-over-year, making it a high-margin business. Additionally, we improved our operational efficiency, resulting in a year-over-year reduction of 7% in total costs. This led to a 37% increase in gross profit, with the gross profit margin improving to 22% compared to 16% last year. We leveraged technology upgrades and enhanced operational management; for instance, our bandwidth costs continued to decline, down about 16% year-over-year and 12% quarter-over-quarter. Other fixed costs, such as labor and operational costs, also fell approximately 7% quarter-over-quarter. You may have noticed that our overall operating expenses have decreased significantly, around 11% year-over-year, while daily active users increased by 18% year-over-year. We will continue to actively manage our operating expenses, particularly marketing costs, which are already down about 30% year-over-year in Q1. I believe this trend will persist in the coming quarters. We are confident in our ability to control costs and expenses, leading to further improvements in our gross profit margin quarter-over-quarter this year, along with a meaningful year-over-year decline in operating expenses and a continued narrowing of our net loss. Thank you.

Thank you. And that concludes the question-and-answer session. Thank you, once again, for joining Bilibili's first quarter 2023 financial results and business update conference call today. If you have any further questions, please contact Juliet Yang, Bilibili's Executive IR Director or Piacente Financial Communications. Contact information for IR in both China and the U.S. can be found on today's press release. Have a great day.