Bilibili Inc. Q2 FY2024 Earnings Call

Good day, and welcome to Bilibili Second 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 the SEC and Hong Kong Stock Exchange. The non-GAAP financial measures we provide are for comparison purposes only. The definition 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. 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 second 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. We delivered solid second-quarter results with accelerated topline growth, improved margins and healthy community development. In the second quarter, our total revenues increased by 16% year over year to RMB 6.13 billion. Our advertising business led this growth, with ad revenue growing by 30% year over year. Revenues from our Games and Value-added services also increased by 13% and 11% year over year, respectively. The momentum across our business lines is a strong testament to our execution in increasing our commercialization efficiency and unlocking the value of our community. Increased revenues from our higher-margin advertising and games businesses boosted our gross profit by 49% year-over-year. Gross profit margin rose to 29.9% in the second quarter, up from 23.1% in the same period last year, marking the eighth consecutive quarter of margin improvement. Consequently, we significantly narrowed our adjusted operating loss and adjusted net loss by 69% and 72%, respectively, year-over-year. Moreover, we generated a record RMB1.75 billion in operating cash flow in the second quarter. Our deferred revenue balance at the end of Q2 also increased by RMB738 million from the end of Q1. With this progress, we are confident that we can achieve our non-GAAP breakeven target in the third quarter of this year and continue to improve our profitability thereafter. While we have been accelerating our financial performance, our community continued to thrive. In the second quarter, our DAUs increased by 6% year-over-year, reaching 102 million, and the MAUs grew to 336 million. Our community remains highly engaged, with users spending a daily average of 99 minutes on our platform. As we move into the summer season, we continue to see strong seasonality in terms of user engagement and retention. On June 26th, we celebrated Bilibili’s 15th anniversary. Over the past 15 years, our platform has become a regular destination for nearly 70% of China's Gen Z+ population. This journey has brought us tremendous opportunities as these users have become a major consumer force in society. We’ve seen it in our advertising growth as we enhance our infrastructure to facilitate their evolving consumption needs. We’ve seen it in our game business as we reinvent strategy games to resonate more deeply with the preferences of younger audiences. As we continue to unlock the value of our community, we remain committed to our founding mission, to build a welcoming home for talented creators and like-minded individuals to connect over shared interests, and to satisfy their evolving needs for good content and service. With that overview, I would like to discuss our core pillars of content, community, and commercialization in more detail. Beginning with content and community. Our strategy to encourage more high-quality creators to generate content continues to prove beneficial. In the second quarter, average daily video views increased by 18% year-over-year to over 4.8 billion. Our leading content categories, such as games, knowledge, and technology, continued to show solid growth in video views, all increasing by over 20% year-over-year. Meanwhile, users' demand in consumption-related categories also continued to surge in the second quarter. Video views in home appliances & decoration, automotive, and fashion & cosmetics all grew by more than 30% compared with the same period a year ago. We continued to provide effective and diversified monetization channels to incentivize our content creators. In the first half of 2024, about 2.1 million content creators received income on Bilibili. Content creators’ total income through our ads and VAS products increased by 30% year-over-year. Notably, our innovative content-based products, such as premium courses and fan charging programs, are being well received by our users. In the first half of 2024, content creators' total income from these two products increased by over 40% and over 430%, respectively, year-over-year. Looking at our community metrics. In the second quarter, our DAUs spend an average of 99 minutes with us, compared with 94 minutes in the same period last year, driving up users' total time spent by 11% year-over-year. Monthly interactions increased by 11% year-over-year, exceeding 16.5 billion in the second quarter. By the end of Q2, the number of our official members increased by 13% year-over-year to 243 million, and their 12-month retention rate remained strong at around 80%. Moreover, this July, we held our signature offline events, Bilibili World and Bilibili Macro Link, once again bringing our community together in Shanghai. More than 250,000 people traveled across the country to participate in the events, leading to a surge in Shanghai’s travel-related consumption. The growing enthusiasm at these events showed our unparalleled influence among the young generation. Now, I’d like to talk about our commercialization progress in each of our business lines. First on our Advertising business. As our users mature with more disposable income, their commercial value unfolds as they seek more consumption-related content on Bilibili. The demand is there and all we need to do is match the right ads with the right user. In the second quarter, we further improved our ad products and infrastructure to increase our ad efficiency. Specifically, we upgraded our ad placement system, featuring user-friendly placement tools and enhanced conversion capabilities, attracting and retaining more advertisers on Bilibili. In the first half of the year, the number of advertisers on our platform increased by over 50% year-over-year. Moreover, we continued to invest and improve our ad modeling capabilities to better understand our users’ consumption behaviors and preferences, which enabled us to further enhance our ad-matching efficiency. Meanwhile, we incorporated more native video-style ad content, allowing us to expand ad load while maintaining user experience. We plan to further advance these initiatives in the following quarters and help our advertisers create ad materials more easily and place advertisements more automatically. Industry-wise, our top five advertising verticals were mobile games, e-commerce, digital products and home appliances, as well as food and beverage, and automotive in the second quarter. Our anchor verticals continued to deliver strong performances. During the 618 shopping festival, we not only secured more ad budgets from e-commerce platforms but also directly from online merchants in different verticals. Total GMV from video and live commerce increased by over 140% year-over-year during the period. Besides our leading verticals, we also saw incremental ad revenues from emerging verticals. In the second quarter, ad revenues from Internet services, AI, and education all increased meaningfully. Turning to our Games business, game revenues resumed growth by 13% year-over-year in the second quarter to RMB1.01 billion, led by the excellent performance of our recently launched strategy game San Guo: Mou Ding Tian Xia (San Mou) and ACG game Articrafter. Our legacy titles also contributed steady game revenues and demonstrated remarkable longevity. As FGO celebrated its eighth anniversary, it returned to the top 10 on the iOS game grossing chart in July. As for Azur Lane, monthly active users reached a new peak in June with the celebration of its seven-year anniversary. These trends strengthened our commitment to the long-term operation of high-quality games. We were delighted to see our first strategy game, San Mou, become an immediate blockbuster. On the first day of its launch, it ranked in the Top 3 on the iOS game-grossing chart, attracting millions of gamers to the three kingdoms’ battlefields. San Mou also set a new record in our operating history, being the fastest title that hits RMB1 billion game grossing mark. With the launch of the second game season on Aug 3rd, San Mou returned to the Top 3 on the iOS game grossing chart. The decent size of the SLG market, the early success of San Mou, and the long lifecycle nature of SLG games give us confidence that it will become one of our flagship games with enduring longevity. Over the years, our community has expanded exponentially, and so has our gamer base. San Mou's success marks a breakthrough in our genre diversification strategy and shows the vast potential of our games business. We will continue leveraging our leading role as a top gaming community and capitalizing on significant opportunities to reinvent games for the new generation of gamers. Turning to our VAS business. Revenues from our VAS business increased by 11% year-over-year to RMB2.57 billion. We continued to add more live broadcasting content offerings, reinforcing the synergies between our live broadcasting and PUGV ecosystem to better cater to users' diverse interests. We will also further explore opportunities in our other VAS businesses as our Gen Z+ users have demonstrated an increasing willingness to directly pay for the content they love. Our premium members continued to increase, reaching 22.3 million by the end of the second quarter, with over 80% of them subscribing annually or under auto-renewal packages, showing their continued loyalty and trust in our platform. User spending on our other VAS products also grew rapidly in the second quarter, particularly in premium courses, our fan charging program, and avatar decoration. We expect these products to open more monetization potential across our massive PUGV content universe in the future. We believe good content and community can bring people together, and the value of our users is just starting to show its potential. Our community is thriving, and our solid second-quarter results place us just one step away from profitability. We are excited to move forward and take Bilibili to the next level. This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the second quarter of 2024. For a closer look at our financial results, we encourage you to refer to our press release issued earlier today. As a reminder, all amounts are in RMB unless otherwise noted. In the second quarter, we further advanced our commercialization capabilities, delivering accelerated year-over-year revenue growth across our core businesses. At the same time, we continued to expand our margins and considerably narrowed our losses. All of these financial improvements were founded on our topline growth with increased efficiency. Total revenues for the second quarter were RMB6.13 billion, up 16% year-over-year. Our total revenues breakdown by revenue stream for Q2 was approximately 42% VAS, 33% advertising, 17% mobile games, and 8% from our IP derivatives and other businesses. Our cost of revenues increased by 5% year-over-year to RMB4.3 billion in the second quarter, while our gross profit rose 49% year-over-year to RMB1.8 billion. Our gross profit margin reached 29.9% in Q2, up from 23.1% in the same period last year. Our total operating expenses were down 3% year-over-year to RMB2.4 billion in the second quarter. Sales and marketing expenses increased by 13% year-over-year to RMB1.0 billion, mainly due to increased marketing expenses for the new game launch. G&A expenses were RMB488 million, down 10% year-over-year. R&D expenses were RMB895 million, down 15% year-over-year, both related to reduced headcount expenses. We narrowed our adjusted operating loss and adjusted net loss to RMB284 million and RMB271 million in the second quarter, reducing our losses by 69% and 72% year-over-year, respectively. Our adjusted net loss ratio in the second quarter came down to 4% from 18% in the same period a year ago. Cash flow-wise, we generated a record RMB1.75 billion in positive operating cash flow in the second quarter, and a total of RMB2.4 billion in positive operating cash flow in the first half of the year. As I mentioned earlier, driven by the strong performances from our games and ads businesses, our deferred revenue balance at the end of Q2 also increased by RMB738 million from the end of Q1, paving a solid path to achieve our non-GAAP breakeven target next quarter, and sustainable profitability thereafter. As of June 30, 2024, we had cash and cash equivalents, time deposits, and short-term investments of RMB13.9 billion, or $1.9 billion. Thank you for your attention. We would now like to open the call to your questions.

Your first question comes from the line of Daniel Chen of JPMorgan. Please ask your question.

Thank you for the opportunity to ask a question. My question is about advertising. We noticed that advertising growth in the second quarter was very strong, increasing about 30% year-over-year. Could you share what the key drivers behind this growth are? Additionally, what should we expect for advertising growth in the second half? Thank you.

In a challenging macro-environment, Bilibili's second-quarter advertising business saw a 30% year-on-year growth, with quarterly revenue exceeding RMB2 billion for the first time, contributing about one-third of the company's total revenue. Our advertising revenue has been growing for several consecutive quarters primarily due to healthy traffic growth on Bilibili and our continuous efforts to unlock the commercial value of our users. In the second quarter, our daily active users increased by 6% year-over-year, while video views rose by 18% year-over-year, demonstrating ongoing growth in our commercial traffic. Over 70% of China's younger generations use Bilibili, with the average user age reaching 25. This age group has rapidly growing consumption needs and spending power, as shown by the significant growth in our consumption-related content categories. In Q2, video views in categories such as home decor, real estate, automotive, fashion, and beauty each grew by over 30% year-over-year, while daily video views in baby and maternity increased by over 80%. In addition to these fundamental factors, we aim to improve the match between advertisers and users through better infrastructure and industry-based marketing solutions. We made comprehensive upgrades to several advertising infrastructure modules in the first half of the year, including enhancements to our PC placement platform and one-stop placement tools for KA accounts, resulting in a 50% year-over-year increase in performance-based KA advertisers. Our newly launched creative center and application of AIGC technologies also help advertisers optimize their ad materials, with the conversion rate showing over a 30% year-over-year improvement. In Q2, our top five advertisers were from mobile games, e-commerce, digital products, home appliances, food and beverage, and automotive sectors. Specifically, during the June 18 Shopping Festival, we strengthened integrated marketing and advertising collaborations with e-commerce platforms, leading to a 300% year-over-year increase in the number of advertisers on Bilibili and over a 140% year-over-year growth in GMV from live and video commerce. Additionally, 50% of the customers we attracted for various merchants were new users, and for the baby and maternity sector, we brought over 60% of new users. Nearly 40 million users engaged with our live and video e-commerce-related content in the second quarter, reflecting a 70% year-over-year increase. Daily content creators involved in live and video e-commerce grew by over 130% year-over-year, and commerce-related videos increased by over 330% year-over-year, while the number of live e-commerce sessions rose by 270% year-over-year. The consumption potential of Bilibili's female users, who make up nearly half our community, is also being gradually realized, with GMVs in apparel categories rising over four times year-over-year in the second quarter. Looking ahead to the second half of this year, we are confident in maintaining an above-industry average advertising growth rate. The benefits of our product infrastructure optimization are becoming evident, and by enhancing our vertical industry solutions, we aim to expand our market share in key sectors while seeking growth in emerging areas such as online services, education, healthcare, and baby and maternity. Notably, Bilibili's revenue growth is not solely dependent on advertising; we are also pursuing a parallel B2B and B2C strategy in our commercialization efforts. This means we can generate revenue from both advertisers and directly from consumers. Our community aspect encourages users to support content and creators they love, enhancing user spending on our platform. In summary, we will continue to pursue a B2B and B2C parallel strategy: reinforcing our advertising platforms for advertising growth while also tapping into the significant potential of our B2C business through mobile games, premium memberships, and live broadcasting to ensure sustainable revenue growth.

Thank you. One moment for the next question. The next question comes from Felix Liu of UBS. Please ask your question.

Thank you management for addressing my question. Congratulations on the strong quarter and the successful launch of San Guo: Mou Ding Tian Xia. Could management provide more insights into the factors that contributed to the game's successful launch? What are your expectations for the game's overall lifecycle? Looking ahead, what future genres do you plan to explore or invest in? Thank you.

The San Mou game has indeed been a major success in the first half of this year. We not only attracted millions of new players, but we've also received excellent user feedback and gained significant influence in the gaming industry. The game San Mou broke several records in our operational history. Shortly after its launch, it quickly ranked among the top three on the iOS game top-grossing chart and stayed in the Top 10 for the entire following month. San Mou also became the fastest game in Bilibili's history to reach RMB1 billion in revenue. Since last year, we've stressed the importance of focusing on one game over an extended period. For San Mou in particular, the SLG genre is ideal for long-term operation. Starting from August 3rd, we launched the game's second season, and the performance of Season 2 reflects gamers' ongoing enthusiasm and solid retention rates, giving us strong confidence that this can become an evergreen title. Many people have inquired as to why San Mou was chosen and how we selected this game. I believe this success stems from our consistent efforts to create new games and reinvent existing ones to appeal to the younger generation. We recognized this game back in 2022 and invested in the development team that same year. The game's success is not a coincidence; it results from a prolonged period of strategy development and decision-making. Since 2019, our monthly active users have increased by over 200%. As we grow, our gamer community has also expanded, incorporating a broader range of ACG gamers who enjoy various content categories. Five years ago, with only 100 million MAUs, our core gamer profile consisted primarily of ACG enthusiasts. Now, as we evolve into a larger community with 340 million MAUs, our gamer demographics include a mix beyond ACG, embracing SLG as well as many other content types. There is a substantial number of potential SLG players in our community who are generally interested in categories like history, military, social sciences, arts, and knowledge, which align perfectly with potential SLG audiences. SLG represents a vast market based on our observations of existing products. We estimate that there are tens of millions of users who have experimented with SLG games, primarily active on Bilibili. In response to these observations, we initiated a project dubbed NSLG, meaning New SLG. We've identified many players' pain points that remain unresolved in the current market, and we found that existing SLG offerings do not adequately meet the younger generation's needs. We believe that through innovative solutions addressing these pain points and evolving preferences, we can achieve success. The successful launch of this game has validated our strategy. The success of San Mou is credited to the larger trend of opportunities that arise from reinventing games to better serve the needs of the younger demographic. This approach not only applies to SLG but can extend to multiple genres, and we will continue to explore these avenues. Regarding the game's life-cycle expectations, we believe that SLG inherently has longer life cycles. We've observed that our SLG games in the market have been operating for five to eight years. We've set an internal goal for San Mou to remain a viable game for at least five years. Ultimately, the key lies in our commitment to developing games for longevity and sustained operation. Prioritizing the game's longevity is essential. The industry has evolved rapidly, and this is no longer a landscape where quick profits can be achieved easily. We are dedicated to being the leading game company that respects and listens to our users, and we aspire to make this game an evergreen title. Thank you, and I welcome the next question.

Thank you. One moment for the next question. Next question comes from Thomas Chong of Jefferies. Please ask your question.

Thank you, management, for taking my question. My question is about the trend in our content offerings. As the average age of the Bili ecosystem has reached 25 years, could management discuss the development of our content strategies, the outlook for our content categories, and the consumption trends moving forward? Thank you.

Last quarter, I noted that the average age of Bilibili users has reached 25 years, which has led to significant changes in our content offerings as user needs have evolved. We've observed the emergence of many new content categories within our community. Bilibili serves not only as a hub for young people's interests and hobbies but also as a place for their lifestyle consumption. This shift is reflected in our content consumption data, as the younger generation progresses through different life stages, leading to rapid growth in content categories related to their consumption. For instance, in the second quarter, views in categories like home decor, real estate, automotive, and fashion and beauty increased by 39%, 43%, and 30% year-over-year, respectively. Additionally, the daily views for baby and maternity categories saw an 80% increase compared to last year. This aligns with our users' average age advancing to 25, which indicates that nearly half of our users are over this age. This demographic shift naturally brings broader interests and consumption needs that they explore on Bilibili. Because Bilibili features authentic and professional videos, and many are mid-to-longer format, it becomes the preferred destination for the younger generation before making significant purchases. Users are drawn to Bilibili for higher-priced items because trust in the platform and its content creators' expertise is crucial. Moreover, making a decision on a vehicle based on short video clips can be difficult. Regarding automotive content, in the first half of this year, an average of 73 million users per month engaged with automotive-related material, which indicates that Bilibili offers some of the finest new car reviews across platforms. Personally, I find the new car reviews to be exceptionally professional and well-produced, and we believe that video is the ideal format for these reviews and walkthroughs. Now, addressing emerging content categories, let's consider our traditional leading categories and the interests of the younger generation. In the second quarter, views in games, knowledge, and tech categories also showed over 20% year-over-year growth, with growth rates of 21%, 29%, and 29%, respectively. This demonstrates that we have fostered a strong mindset among the younger generation, who actively seek out interest-based content. For instance, just two days ago, on the launch day of Black Myth: Wukong, tens of thousands of users were live-streaming their gaming experiences on Bilibili, which is remarkable in gaming history. On that day, we recorded a peak of over 2 million concurrent users watching content related to Black Myth: Wukong. This figure indicates that we are continually expanding our interest-based content verticals. We have consistently maintained that a community's competitiveness is evidenced by its ability to produce quality, new content on an ongoing basis. We believe that over the past 15 years, Bilibili has demonstrated its capability to continually broaden its content offerings and categories.

Thank you. The next question comes from the line of Xueqing Zhang from CICC. Please ask your question.

Thank you to management for addressing my question. I would like to ask about our financial outlook. The company has shown continuous margin expansion and strong cash flow this quarter. Can management provide insights into the financial outlook for the second half of 2024? Specifically, for the third quarter, will we break even or generate a profit, and what is the mid-to-long term profitability outlook? Thank you.

This is Fan. Let me take your question. Our financial performance in the second quarter demonstrates our business model has great potential for increasing the gross profit margin. In Q2, our overall revenue grew by 16%, while gross profit increased significantly by 49% year-over-year. The gross profit margin increased nearly 7 percentage points year-over-year from 23% to nearly 30%, the eighth consecutive quarter of margin improvement. This was primarily due to our ability to control costs and achieve rapid revenue growth. With the continued growth of our high-margin advertising and game business, there's still substantial room for further improvement in our gross margin. Additionally, it is worth noting that our operating cash flow for the first half of the year was RMB2.4 billion, and our free cash flow reached RMB1.5 billion. This indicates that our business has entered into a positive cycle. Looking ahead to our financial performance in Q3, we see that the deferred revenue balance increased by over RMB770 million quarter-over-quarter, laying a good foundation for the third quarter revenue growth. We expect the revenue from our games and advertising business to maintain strong growth momentum, along with a significant quarter-over-quarter growth in gross margin. At the same time, in addition to achieving our initial goal of breakeven in Q3, we now aim to achieve meaningful operating profit on a non-GAAP basis. Meanwhile, we are delighted to see solid growth across our core business lines. Our growth momentum, along with prudent cost and expense management, will lead us to continue expanding our revenue scale and profitability in 2025 resulting in ongoing improvement in our operating margins.

Thank you. Next question, please.

Thank you. The next question comes from Yiwen Zhang from China Renaissance. Please go ahead.

Thank you for taking my question. I would like to know how we can apply AI through various user scenarios on Bilibili, and what potential there is for the future. Thank you.

It is known that Bilibili has the most extensive and highest quality AI content across the Internet. The reason behind this is that most of our users have higher education backgrounds and are located in first and second-tier cities, which fosters their curiosity. Based on our internal data for the first half of the year, over 80 million users, on average each month, are watching AI-related content on Bilibili. This content is not just limited to one word or 15-second headlines; it includes extensive professional material and in-depth discussions about AI. As a result, Bilibili has become the most comprehensive AI platform. First, we believe we have the highest number of users genuinely interested in AI content. Second, we have the most AI professionals active on the platform. Lastly, over 90% of domestic AI companies have established accounts and engage with our users. The high concentration of AI content and users gives us a natural advantage in exploring AI applications. We see many users beginning to connect AI with their content creation. For example, in 2023, one user used AI tools to mimic a famous singer's voice, leading to the singer expressing her support for this type of creation. This year, we have seen a variety of AI-powered music creations, animations, and short plays on Bilibili. Our operational team has even organized an AI short play competition, attracting significant user participation. Regarding our own content creation tools, we have integrated AI into our creation tools, which we believe will enhance content creation efficiencies for existing creators and empower regular users to become content creators as well, benefiting overall content supply. We also utilize AI to enhance user experiences directly. Currently, we have made the AI Assistant and AI Search available to all users. With a large amount of knowledge-based content, users can ask our AI Assistant or AI Search to summarize keywords and key messages from videos, providing quick summaries for those looking to save time. We have additional AI tools, such as AI Translations, which assist in translating various languages, helping content creators from Tibet translate their local language into Mandarin. Another tool, the AI Assistant, can summarize videos into short articles outlining key points, which improves user experience. We believe that AI should be a technology that benefits everyone, including users and platforms. Effective AI development requires collaboration among many companies rather than isolated research. Therefore, we maintain a proactive and open approach, collaborating with leading domestic AI companies across various initiatives. We believe that through joint efforts, we can enhance user experiences and help our partners realize their full potential alongside Bilibili and our users. Many may have noticed that our AI-generated video capabilities come from our partnership with a leading AI company, and we plan to continue these collaborations to provide better, more efficient, and more creative experiences for our users.

Thank you. That concludes today's answering session.

Thank you. Thank you once again for joining Bilibili's second 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 or Piacente Financial Communications. 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.