Bilibili Inc. Q1 FY2024 Earnings Call

Good day and welcome to Bilibili First Quarter 2024 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 SEC and the Hong Kong Stock Exchange. The non-GAAP financial measures we'll provide are for comparison purposes only. The definition 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 at ir.bilibili.com. Joining us today from Bilibili’s Senior Management are Mr. Rui Chen, Chairman of the Board and Chief Executive Officer; Ms. Carly Lee, Vice Chairwoman of the Board and Chief Operating Officer; and Mr. Xin 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 first quarter 2024 conference call to discuss our financial and operating results. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. 2024 will be a turning point in our journey toward profitability. We are already steadily on this path, advancing both our financial profile and community growth in the first quarter. Total revenues for the quarter came in at RMB5.7 billion, up 12% year-over-year. Growth in advertising and VAS revenue, in particular, accelerated at 31% and 17% year-over-year respectively. With increasing revenue contribution from the higher margin ad business and our continued efficient operations, we achieved a notable 45% year-over-year increase in our gross profit. Our gross profit margin reached 28.3% in the first quarter compared with 21.8% in the same period last year, marking the seventh consecutive quarter of margin improvement. As a result, in the first quarter, our adjusted operating loss and adjusted net loss meaningfully narrowed by 52% and 56% year-over-year respectively. Meanwhile, we generated RMB638 million in operating cash flow in the first quarter. The solid progress we have made is placing us firmly on track to reach our profitability goal this year. While we focus on improving our commercialization capabilities, we continue to attract more users and foster a vibrant community. In the first quarter, our DAUs increased by 9% year-over-year to 102 million. Our MAUs grew by 8% year-over-year to a new high of 341.5 million. User engagement in the first quarter was also strong, with users spending more time with us than ever, bringing our DAUs' average daily time spent to a record 105 minutes. As a result, user total time spent on our platform increased by 19% year-over-year. As we advance through the year, we will continue to dedicate our resources to enhancing our commercialization capabilities, particularly in our high-margin revenue streams. First, we are working to advance our advertising infrastructure and efficiency to sustain the positive momentum of our ad business. Second, we will bring more high-quality games to our users. Our highly anticipated licensed game, San Guo: Mou Ding Tian Xia, is scheduled for launch on June 13. This is the first SLG game that caters to our expanding gamer base. In addition, we will continue to increase and diversify our vast content offering to convert more paying users and improve margins. We believe these initiatives, together with our ongoing efficient operating leverage, will naturally lead to improved financial results as we approach profitability. We remain committed to our core mission, building a stage for content creators to shine, fostering a healthy, vibrant community for users to enjoy, and bringing value to our shareholders and partners over the long term. With that overview, let's discuss in detail our core pillars of content, community, and commercialization. Beginning with content and community. In the first quarter, our leading top content keeps thriving with video views in games, entertainment, and the tech and knowledge categories increasing by over 20% year-over-year. Among these leading verticals, we have emerged as a go-to platform for AI-related content and discussion in China. In the first quarter, daily active content creators and video views of AI-related content grew by over 60% and over 80% year-over-year respectively, driving a surge in AI-related ads and making it one of our fastest growing ad verticals. Also, we continuously bolstered our support to emerging content categories, providing customized operational and traffic assistance for high-quality content creation. During the quarter, video views in automotive, home appliances, decoration, fashion, and baby and maternity grew rapidly, with over a 40% increase year-over-year. These categories meet our users' evolving content needs as they enter new life stages while also inherently possessing strong consumer appeal. In many cases, good content can also be a good commercial, attracting more advertisers and incentivizing more creators to join our platform. For instance, ad revenues from home appliances and decoration increased notably, by over 70% year-over-year in Q1, and the daily active content creators in this category grew by 30% year-over-year. As such, our community metrics in the first quarter are encouraging. Our average daily video views increased by 22% year-over-year to nearly 5 billion. Our users spent a record-setting 105 minutes on the platform daily in the first quarter, compared with 96 minutes in the same period last year. Meanwhile, monthly interactions exceeded 16.4 billion, a 15% year-over-year increase. At the end of the quarter, we had over 236 million official members, which increased by 15% year-over-year, and their 12-month retention rate remained around 80%. In terms of recent community events, our sponsored Esports team, BLG, won their first championship of the League of Legends Pro League 2024 Spring Season and second place in the Mid-Season Invitational 2024, attracting more Esports enthusiasts to our platform. What's more, our extensive content library and user base provide us with a natural advantage to pioneer AI exploration. We are launching various AI-related applications to benefit all stakeholders in our community, including our users, content creators, and advertisers. With our AI assistance in searching and video watching scenarios, users can get information more efficiently and receive more personalized content recommendations. On the creator front, we launched the AI content creation tool, enabling content creators to customize their digital human and voice, improving creative efficiency. As for advertisers, we are launching a creative center, which will enable advertisers to easily generate headlines and edit materials for their ads. More importantly, with our AI-enabled algorithms, our content and ads can be more effectively matched with our users' consumption needs. Now I would like to talk about our commercialization progress and how we achieve margin expansion and reach profitability. For the first quarter, our total revenues increased by 12% year-over-year to RMB5.7 billion. As our biggest top-line growth driver, revenues from our advertising business were up by 31% year-over-year to RMB1.7 billion. Performance-based ads continue to be the primary growth contributor, up over 50% year-over-year in the first quarter. We are encouraged by the results we achieved in Q1 and we expect growth momentum to continue. For the first quarter, our top five advertising verticals were mobile games, digital products, home appliances, e-commerce, automotive, and skincare and cosmetics. As I mentioned in our last quarter's earnings call, we are allocating more resources to integrate ad products within our content ecosystem in a more native, natural, and seamless way. We have made significant progress in the first quarter. We integrated and upgraded our ad platforms with visualized data analysis and more user-friendly tools, empowering advertisers to bid more efficiently. In addition, as we deepen our understanding of user consumption profiles, we are further improving our ad matching algorithm to be more accurate and targeted. Collectively, these enhancements in efficiency, as well as our increasing traffic, enabled us to secure more advertising budgets from our ad customers. In addition, our video and live commerce ad products, combined with direct sales conversion tools continue to yield results. These transaction-based ads enable advertisers to effectively transition users from product viewing to making purchases. As of last week, our total video and live commerce GMV in women's fashion and clothing has exceeded the corresponding total GMV for the entire year of 2023. Our video and live commerce products provide an excellent way to unleash commercial value for our content creators. The number of content creators who earn income via video and live commerce has more than doubled year-over-year in the first quarter. On top of the progress we made in the first quarter, we are working on more product upgrades, some of which are ready to be applied in the upcoming 618 Shopping Festival. We will unveil better ad placement and analysis tools, allow more flexible ad formats, and expand additional ad scenarios. This empowers advertisers to achieve smarter, more creative, and integrated advertisements across our content ecosystem, leading to better branding and conversion results. Turning to our VAS business, driven by the growth of live broadcasting, revenues from our VAS business increased by 17% year-over-year to RMB2.5 billion in the first quarter. We continue to strengthen the synergies between our live broadcasting content offerings and our PUGV ecosystem, especially in our advantageous content categories like games, VTubers, and entertainment. Moreover, through refined operational measures, we are also improving our gross margin while increasing the supply of high-quality live broadcasting content. The number of premium memberships remained steady at 21.9 million as of the end of the quarter, with over 80% of premium members on annual subscription or auto-renewal packages. Users are also showing a growing propensity for spending on our other VAS products, including our premium online courses, exclusive fan charging video products, and virtual community accessories. We will continue to actively explore these unique community features to provide users with products and experiences they love. Turning to our game business, our revenues were RMB983 million for the first quarter. In April, we launched an exclusive license game, Artifactory, which was well received by game lovers. Looking at our game pipeline, we expect to release our highly anticipated SLG game, San Guo: Mou Ding Tian Xia, on June 13. Over 2 million players had already pre-registered as of today. We also plan to launch a Japanese RPG title, Heaven Burns Red, in the third quarter. Last but not least, as we make progress on the commercialization front, we are actively shouldering our social responsibilities as a cultural enterprise. We published our 2023 annual ESG report last month, outlining our efforts in creating and bringing value to young generations in China. Collaborating with content creators, employees, and industry partners, we strive to explore more technological innovation and engage in social welfare activities to positively impact society at large. This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the first quarter of 2024. I’d now like to review our first quarter financial highlights. For a closer look at our financial results, we encourage you to refer to our press release issued earlier today. Our commercialization and operational efficiency enhancement initiatives continued to yield great results in the first quarter. We improved the quality of our revenues, expanded our margin for the seventh consecutive quarter and significantly narrowed our losses based largely on our revenue growth and platform efficiency. Total revenues for the first quarter were RMB5.7 billion, up 12% year-over-year. Our total revenue breakdown by revenue stream for Q1 was approximately 45% VAS, 29% advertising, 17% mobile games, and 9% our IP directives and other businesses. Our cost of revenues increased by 2% year-over-year to RMB4.1 billion in the first quarter, while our gross profit rose 45% year-over-year to RMB1.6 billion. Our gross profit margin reached 28.3% in Q1, up from 21.8% in the same period last year. Our total operating expenses were down 2% year-over-year to RMB2.4 billion in the first quarter. Sales and marketing expenses increased by 5% year-over-year to RMB927 million, mainly due to early promotion expenses related to the release of our upcoming SLG game. G&A expenses were RMB532 million, down 7% year-over-year. R&D expenses were RMB965 million, down 6% year-over-year. We cut our adjusted operating loss and adjusted net loss to RMB512 million and RMB456 million in the first quarter, narrowing these losses by 52% and 56% year-over-year respectively. Our adjusted net loss ratio in the first quarter improved to 8% from 20% in the same period a year ago. For the first quarter, we also generated RMB638 million in positive operating cash flow, demonstrating our business's ongoing healthy path for sustainable development. We expect to reach positive non-GAAP operating profit in the third quarter of 2024 through our sustained top-line growth, as gross profit margin improvement. As of March 31, 2024, we had cash and cash equivalents, time deposits, and short-term investments of RMB12.9 billion or $1.8 billion. In March this year, we completed the repurchase right offer for our April 2026 notes. After completion of this transaction, the aggregate outstanding principal amount of April 2026 notes, 2027 notes, and the December 2026 notes was $433 million. We believe our cash position is sufficient to cover all of our remaining convertible bonds. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Thank you. We will now begin the question-and-answer session. Our first question comes from Thomas Chong of Jefferies. Please go ahead.

Thanks Management for taking my question. My question is about our online advertising business. Given advertising growth exceeded our expectations, can management comment on the key growth driver? One of the areas that we have strengthened is our ad product offerings and our ad technology upgrades. On the other hand, if we look into Q2, particularly for June 18th, can management comment on the advertising trend and how we should think about 2024 advertising outlook? Thank you.

Thanks! I will address your question about our advertising growth. We’ve seen a solid increase in our ad revenue in Q1 which reached RMB1.67 billion, up 31% year-over-year. One of the key drivers is maintaining a good user experience, which we prioritized. We increased our overall advertising inventory and further expanded our ad scenarios such as Moment and Search. By mixing natural and commercial traffic, high-quality advertising content can gain more organic traffic, resulting in an increase in effective ad inventory. Despite this increase in effective ad inventory, our ad load remains low, leaving us significant room to expand compared to other platforms.

Another growth driver is that we have integrated our Sparkle ads into our advertising system and improved our ad placement tools. We have enabled and achieved smart ad placement in different app scenarios. In Q1, over 50% of Sparkle ads also purchased our content promotional service, known as project takeoff. We also launched a creative center to enable bulk processing of ad materials. We believe the continuous exploration of AIGC-related functions can help us to improve our ad efficiency.

Additionally, on our content creator side, we launched our content promotional tools for creators. Project takeoff was officially upgraded to a new product called Bi Huo, which was made available to all content creators in Q1. This function allows creators with a one-stop service to promote their content through paid traffic amplification, helping them increase fans and improve their monetization capabilities. The number of clients who purchased our content promotional service in Q1 increased by 190% year-over-year, while the repurchase rate and satisfaction rate continue to improve.

We have optimized our marketing data infrastructure and improved our algorithm efficiency. We refined various commercial techs to provide advertisers with more comprehensive measurement and guidance on branding and marketing outcomes. Currently, we have launched a trial version of our B Data and Z Index for advertisers in games, mobile phones, and cosmetics, and we expect to push it out to more industry verticals in Q2 and Q3.

Furthermore, we have deepened our vertical industry solutions. In Q1, games, digital products, home appliances, and e-commerce platforms were our top three growth factors, showing high double-digit growth year-over-year. In the gaming sector, we have focused on high-quality games covering all stages of game operation, from pre-launch to long-term operations. Notably, we have captured our incremental shares in the mini-games market resulting in a 50% increase in daily ad spending. As for the e-commerce platforms, we achieved a diversified customer structure this quarter. In addition to traditional partners like Taobao, Jingdong, Tmall, and Pinduoduo, we expanded our collaborations with Vipshop, Kuaishou, and Xiaohongshu. We improved our ARPU during our non-shopping festival period, and we expect the advertising budgets from merchants will continue to fuel our advertising growth.

To summarize, we anticipate that we can replicate our ad solutions and apply them to more additional verticals, including Automotive, Internet services, Healthcare, and Education Industries. Moreover, we expect over 30% year-over-year growth for the June 18th shopping festival this year, and we have increased our share of advertising budget for this significant shopping festival. This year, we will continue to execute our open-loop strategy, establishing deep partnerships with Alibaba, JD, Pinduoduo, and Vipshop.

Additionally, we have upgraded our partnerships from pure profit collaboration to traffic plus content collaboration. Brand advertising revenue is expected to increase by 40% year-over-year during this period. We also expect a significant increase in the merchant budget, projected to rise over 250% year-over-year.

As for the June 18th shopping festival, we have observed improved consumer willingness among Bilibili users. In Q1, 37 million users watched transaction-related content, nearly doubling year-over-year. We believe our users have shown more interest in viewing commercial or e-commerce-related content on our platform. Our content creators have benefitted from this improvement, seeing over 100% year-over-year increase in revenue generated through live and video commerce. The top four industries in terms of transaction volumes are digital products, home appliances, food and beverage, apparel, and beauty and cosmetics. In summary, we remain confident in achieving high growth rates for our advertising throughout the full year.

Thank you. Next question comes from the line of Lei Zhang from Bank of America. Please go ahead.

Thanks management for taking my question. Congrats on a strong advertising growth. My question is mainly about the game business. Can you provide an update on the overall game outlook for this year? And also your expectations regarding the upcoming new game San Guo: Mou Ding Tian Xia? Thank you.

Bilibili has always had the largest and the most high-quality game-related content library. Simultaneously, we have the highest density in terms of high-quality gamers, giving us a great advantage in the gaming business. For the full year, when we think about the game business, two words summarize our direction: stability and innovation.

Stability refers to Bilibili's deep attention to our legacy classic games. We expect long-term operation, maintaining the stickiness of our gamers and fostering continuous innovation in content. Our legacy games consistently show strong retention and engagement.

FGL, one of our most popular games, has been active for 8 years. During its April content upgrade, this game returned to the top iOS grossing chart. Another game, after its 7th year anniversary, also returned to the top 10 grossing charts on iOS. From Bilibili's perspective, maintaining and operating these tested games for an extended period is more beneficial than merely focusing on new games.

Additionally, we launched a new game called RG: Crafter, a creative card game inspired by traditional Chinese culture. This game has resonated well with traditional Chinese cultural enthusiasts. So, we’ll continue to seek new opportunities by integrating ACG elements with new categories to expand our gamer demographics. Regarding San Guo: Mou Ding Tian Xia, we have a launch date set for June 13. This game has over 2 million pre-registration users already, with positive feedback from multiple rounds of beta tests.

To elaborate how we explore new fields, for San Guo: Mou Ding Tian Xia, we signed this game two years ago. Our decision was based on discovering a substantial demographic interested in topics like history, military, and political knowledge, which represents a significant content category on Bilibili.

We worked together with the game developer on innovations in gameplay that address the preferences of our Gen-Z users, focusing on enjoyment rather than competition. User feedback has been positive so far for this approach.

Thank you. One moment for the next question. Our next question comes from the line of Xueqing Zhang from CICC. Please go ahead.

Thanks management for taking my question. My question is about user engagement. The company's first quarter time spent hit a new high and the average daily really also achieved good growth. So what's the main driver behind that? And which content categories are expected to have great potential in the future? Thank you.

Bilibili has unique content categories that provide significant advantages over other platforms. Users naturally seek out knowledge, ACG, tech, and digital product content. A genuine need for this type of content exists among users.

In 2023, we observed substantial growth in technology, knowledge, and gaming sectors. The viewership of tech content has risen by 37%, knowledge by 28%, and gaming by 24%. By enhancing our leadership in these categories, we can anticipate natural traffic growth while actively forming new content categories.

As the average age of Bilibili users is around 24, we've noticed the rise in consumption needs in family-oriented content, automotive, and home appliances. In the first quarter, video views in the baby and maternity category grew by around 100%. We see strong growth for automotive and home appliances as well.

In the first quarter, our overall community has delivered strong growth. Our DAU grew by 9% and our video views grew by 22%. The daily average user time spent has reached a historical high of 105 minutes. This demonstrates that our content development and community operation strategies are effective, and we will continue to execute this strategy to achieve sustainable growth moving forward.

Thank you. One moment for the next question. Our next question comes from Felix Liu from UBS. Please go ahead.

Thank you management for taking my question and congratulations on the good GP margin performance in the first quarter. May I check what specific areas you did well in cost control? How do you see the mid-to-long-term margin outlook, as well as the third-quarter profitability target, if any updates? Thank you.

Thanks Felix, this is Fan. I will take this question. In Q1, our total revenue grew by 12% while our cost of revenue only increased by 2% year-over-year, leading to a 45% growth in our gross profit. Thanks to the improved operational efficiency, our non-GAAP operating expenses decreased by 2% year-over-year and 8% quarter-over-quarter, which led to further loss reduction. Our path to profitability is mainly driven by revenue growth and continuous gross profit improvement, which we believe is more sustainable. Specifically, the gross profit margin improved reaching 28% in Q1. This improvement is largely attributed to high-margin businesses, like our advertising revenue, which saw a 31% increase year-over-year. We expect that in Q2 and Q3, with rapid growth of advertising and recovery in our game business, our gross profit margin will improve further, possibly reaching 30% in Q3, with non-GAAP operating breakeven also expected in Q3. We are quite confident in this trajectory. In the longer term, the gross profit margin will depend on the scale of revenue and the business line mix. We continue to see great potential ahead. Achieving breakeven is our first step, and we will allocate more resources toward enhancing our commercialization efficiency while refining operational strategies to achieve sustained improvements in gross profit margin and net profit margin.

Thank you. Our last question comes from the line of Lincoln Kong from Goldman Sachs. Please go ahead.

Thank you management for taking my question. My question is about the paying users business. We see the company is now close to 30 million paying users. Can you elaborate on the prospects of community-based content payment? Thank you.

Bilibili has always been an interest-based video community. Our users possess three key characteristics: high retention, high engagement, and high ARPU. These traits reflect users' strong sense of belonging, making content payment a natural monetization method for Bilibili.

At the end of the first quarter, we had close to 22 million premium paid members. Interestingly, 80% of them opted for long-term commitments like monthly automated subscriptions or yearly subscriptions, setting us apart from regular content platforms.

Beyond traditional broadcasting and premium membership, we continually explore new business models, combining community and content. This includes premium courses, charging stations for content creators, and custom community decorations. Users acquire unique experiences through these services while showing appreciation for their favorite creators. This creates a virtuous growth cycle in our community.

In Q1, the combined revenue from premium membership, premium courses, and community customizations approached RMB1 billion. Our premium courses now cover diverse categories, including live skill sets and interest-based knowledge, and have become essential monetization avenues for content creators. In Q1, the number of creators earning revenue from premium courses increased by over 450%, with their overall revenue also up by 45% year-over-year.

Additionally, we recently upgraded our charging program to include exclusive fan charging videos. In Q1, the number of content creators who earned income from the charging project increased by 47% year-over-year, and the total GMV of the charging program rose by 125%. For example, one content creator generated over RMB10 million from the release of four episodes of high-quality documentaries. We are very optimistic about the potential in new areas such as short plays, documentaries, and short films on Bilibili.

In the second half of this year, we plan to systematically review and enhance our value-added services, including those related to content. We're quite confident that this part of the business will continue to generate additional revenue and help our content creators earn more.

Thank you. And that concludes the question-and-answer session. Thank you once again for joining Bilibili's First Quarter 2024 Financial Results and Business Update Conference Call today. If you have any further questions, please contact Juliet Yang, Bilibili's Executive IR Director. Contact information for IR in both China and the US can be found on today's press release. Thank you, and have a great day.