Earnings Call Transcript - BILI Q3 2020

Operator, Operator

Good day, and welcome to the Bilibili 2020 Third Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Juliet Yang, Senior Director of Investor Relations. Please go ahead.

Juliet Yang, Senior Director of Investor Relations

Thank you, Operator. Please note the discussion today will contain forward-looking statements relating to the company's future performance, and are intended to qualify for the Safe Harbor from liability, as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion. A general discussion of the risk factors that could affect Bilibili's business and financial results is included in certain filings of the company with the Securities and Exchange Commission. The company does not undertake any obligation to update this forward-looking information, except as required by law. During today's call, management will also discuss certain non-GAAP financial measures, for comparison purpose only. For a definition of non-GAAP financial measures, and a reconciliation of GAAP to non-GAAP financial results, please see the 2020 third quarter financial results news release 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 Investor Relations website, at ir.bilibili.com. Joining us today on the call 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. Sam Fan, Chief Financial Officer. And I'll now turn the call over to Mr. Fan, who will read prepared remarks on behalf of Mr. Chen.

Sam Fan, Chief Financial Officer

Thank you, Juliet. And thank you everyone for participating in our 2020 third quarter conference call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. We see a golden opportunity to expand our reach in today's market to seize this window we step up our user growth, with a focus on further growing our content, expanding our brand awareness, and targeted channel acquisition. This will especially fit for our third quarter pre-season. As a result, our user base hit a record high. In August, our MAUs exceeded the 200 million milestone, marking a new monthly record. Total revenue for the third quarter was up 54% to 197 million, and the DAU were up 42% to 53 million, both on a year-over-year basis. Mobile users also continue to grow at a faster pace. Mobile MAUs were up 61% year-over-year to 184 million in the third quarter. Our users are highly engaged, spending an average of 81 minutes per day on our platform, making Bilibili one of the biggest video communities in China. The quality growth of our users is reflected not only in the high engagement levels but also in the paying user conversions. MPUs were up 89% year-over-year, which is 15 million in the first quarter. Our paying ratio improved to 7.6% from 6.2% in the same period last year. We've included trade volume of our topline expansion. In the first quarter, revenue reached another record high of RMB3.2 billion, up 74% year-over-year. While we grow our topline, we also improved our gross margin. Gross margin was 23.6% in the third quarter, up from 18.9% in Q3 last year. We are gaining even more operating leverage. While Bilibili has become a household name among young generations, there are large groups of potential users who are just beginning to learn about us. The Gen Z community acts as our anchor and will begin to cast an even wider net. Today, we are gaining traction with more diverse demographics than ever before. Marketing campaigns such as our newly introduced slogan, "Bilibili: all the videos you like" have helped us to define and promote our appeal to a mass audience. During the third quarter, we launched a series of online and offline campaigns to promote our brand proposition to an even broader audience across different demographics. This strategy is working, and we are carrying these efforts into the fourth quarter. Our industry partnerships are also strengthening our content offering and brand. In August, we entered into a five-year business cooperation agreement with Huanxi Media through a strategic equity investment, in which we can exclude the broadcasting rights to Huanxi's existing and upcoming high-quality movies and TV dramas. We have also entered into a three-year exclusive partnership with Riot Games for the exclusive live broadcasting rights of the League of Legends World Championship. We have significantly enhanced our position and brand in the important E-Sports genre, especially during the F10 this year. In October, we deepened our partnership with Sony by signing a strategic agreement with a subsidiary, Aniplex, to bring more premium anime content and mobile games to our users. These expanding alliances enrich our company offering and demonstrate that these domestic and international industrial leaders recognize our unique value in China's entertainment market. While we are working to build our brand and attract more users, increasing demand for high-quality video content powers us well to capitalize on the growth perspective. China represents the largest online video publishing market in the world. According to the Phoenix Report, by the end of the first half of 2020, 819 million users in China consumed online content in video format. Faster networks and smarter hardware enable more accessible content creation and consumption. Our experience over the past decade has made us a pioneer in the video-lization movement. We are committed to capturing this market opportunity by executing our growth strategy, which Bilibili will yield positive returns in the long run. With that overview, I would now like to provide some more color on our content, community, and commercialization activities. I will begin with a review of our content. Our PUGV content ecosystem is the cornerstone of our business and the main engine that powers our growth vehicle. For the third quarter, we had approximately 1.7 million content creators uploading 5.6 million videos per month, representing increases of 51% and 79% respectively, both year-over-year. We continue to cultivate a nurturing environment to allow content creators to grow and flourish. By promoting originality and ingenuity, our algorithms enable the highest quality of original content to quickly gain traction and expand its fan base. In the third quarter, the number of videos that achieved 1 million views increased by 73%, and the number of content creators with over 10,000 followers grew by 75%, both year-over-year. Meanwhile, we continue to help our content creators impact monetary rewards through our cash incentive program and our newly launched advertising platform Sparkle, a matchmaking platform designed to better connect advertisers and content creators, bringing more commercial opportunities while creators provide a safe and scalable portfolio for native app. Each of these components helps us maintain and grow this important PUGV ecosystem. Our top five verticals in terms of video views in the third quarter were lifestyle, gaming, entertainment, anime, and tech & knowledge. Among these, tech & knowledge is emerging as one of the fastest growing sectors. Learning on Bilibili is also trending, as many users are attracted to our platform looking for informative and educational content. In the past 12 months, nearly 100 million users across different age groups have watched knowledge-related videos on Bilibili, making us one of the top learning platforms in China. While we enhance our content offering in our leading verticals, we are actively expanding our content reach into new categories. The automotive sector was one of them. In Q3, video views in this area grew roughly 177% year-over-year. This reflects our longevity and staying power with users as they mature. In this case, our content users have come to a life stage for auto consumption. This situation also helps us attract a wide demographic and open new advertising opportunities across broader industry groups. Turning to our OGV, our investment in IP content is paying off. With our stronghold in this genre, Bilibili-produced Chinese anime not only attracts massive new users but also becomes the most effective driver of premium memberships. This is especially true for our self-produced Chinese anime, generating 260 million views in just the three months since its launch. In September, we were excited to welcome the thrilling TV drama, "Run for Young: Feng Quan Shao Nian De Tian Kong" to our platform, marking the first TV drama to form our collaboration with Huanxi Media. This show was an immediate hit upon release and trended number one on Bilibili's most searched list for four weeks. It has generated 410 million views, setting a new record in this category. We are also reaching new heights with our documentary and variety show department. Our very first self-produced music variety show, "Rap for Youth," received outstanding reviews beyond our typical community, generating approximately 410 million video views and 8.2 million bullet chats. The success not only enriches our music category but also attracts and inspires a growing number of musicians and music lovers. Looking at documentaries, we believe our recent agreement with BBC Studio is a strong endorsement of our documentary quality and will further enhance our content library. Also, building on the success of last year's New Year's Eve gala, we will be hosting another exciting New Year's Eve gala event this year. Turning to our community, while user growth continues to thrive, we set a number of new records across our key community metrics. In the third quarter, our Bilibili views reached 1.3 billion, up 77% year-over-year. Our users generated 5.5 billion monthly interactions through bullet chats, comments, likes, and Bilibili moment posts, up 117% year-over-year. The number of official members is also on the rise. At the end of the quarter, we had 97 million official members who passed our 100-question exam, up 56% year-over-year, with retention levels remaining strong well above 80%. With a decade of experience under our belt, we believe our community remains one of our biggest competitive advantages in the evolving online entertainment industry. Turning to our commercialization progress, the growing topics on our platform enrich each of our business lines. We rolled out more premium content and services to meet our users' diverse entertainment needs. Our games business, revenue for our mobile game business reached RMB1.3 billion, up 37% year-over-year, accounting for 40% of our total revenues. During our massive game leverage, we continue to expand our game offering in diverse genres to maintain the popularity of our existing titles. Our new blockbuster game, "Princess Connect," continues to resonate with our fans and attract new users. It was another strong testament to our ability to distribute and operate games in the APG genre. In October, we renewed our exclusive FGO license with Aniplex and celebrated our fourth anniversary. Additionally, we launched a few new titles during the first quarter, including "Animistic," which have been well received by our users. For our game topline, we have 10 titles in diverse genres that have acquired approvals and are ready to be released in the coming quarter. Next in queue is "Sword Art Online," planned for launch at the beginning of 2021. Looking at our jointly operated games, we continue to work with leading game developers to bring our users premium titles. Our solid reputation, strong game operation capabilities, and high-demand gamer demographics have made Bilibili the go-to platform for gaming partners. In September, as the main Android partner in China, we began jointly operating the highly anticipated game, "Genshin Impact." The massive success of Genshin on our platform is yet another feather in our cap. Our near-term joint titles include a plan to distribute NetEase's "Harry Potter." Turning to our VAS business, revenue from VAS increased by 116% year-over-year, reaching RMB980 million in the third quarter. Our growth was mainly driven by increased contributions from premium memberships, live broadcasting, and other value-added services. As our brand name continues to spread, we are attracting business partners and live broadcasting hosts, and adding new and diverse content to our growing library. E-Sports is a prime example. Our League of Legends World Championship live broadcasting rights play an important role for Bilibili, including E-Sports genres, allowing us to showcase our capabilities in more live broadcasting experiences. For the entire F10 championship season, total live broadcasting page views related to the game increased by over 300% compared to the same period last year. We're pleased to see our user base growing in this paid segment for advanced or exclusive access to our OTT content. By the end of the first quarter, we had 12.8 million premium members, up 110% year-over-year. As we roll out more excellent, exciting new content, we are confident we can continue converting more paying subscribers. Finally, despite the challenging macroeconomic environment, our advertising business delivered another accelerated growth. Revenue from the segment reached RMB558 million, up 126% year-over-year. Our efforts to spread our brand name not only attracted a wider user group but also impressed many new business partners. Our titles across different industries are turning to Bilibili to tap into this coveted young demographic. In summary, we are on an excellent growth trajectory. With solid execution of our user growth initiatives, we continue to improve our brand equity and reach new heights across key user metrics. The industry trend towards video-lization is working strongly in our favor and provides the most unique community experience for both content creators and users. Capitalizing on this momentum, we aim to further grow our brand, enrich our content offering, and unleash the great potential of our expanding online entertainment ecosystem. This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the third quarter of 2020. Our total net revenues increased by 74% year-over-year to RMB3.2 billion, exceeding the high end of our guidance. With our gaming business accounting for 50% of the revenues, we're pleased with the commercialization progress of our main game offerings and our ability to convert our online traffic into paying users. The average number of monthly paying users increased by 89% year-over-year, to 50 million in the third quarter. Cost of revenue increased by 63% year-over-year to RMB2.5 million. Revenue selling costs, a key component of total revenues, were RMB1.2 billion, a 77% increase compared to the same period in 2019. Gross profit increased by 170% year-over-year from RMB762 million. We are seeing more optionality for diversified longer screens, with more granular contributions from our higher-margin businesses, as well as additional income from paying users, resulting in a gross profit margin that continues to improve, reaching 23.6% in the third quarter. Total operating expenses increased to RMB1.8 billion, up 138% from the same period of 2019. Total marketing expenses totaled RMB1.2 billion, representing a 227% increase year-over-year. The increase was mainly attributed to the increased channel and marketing expenses associated with our app and brand, as well as increased expenses for our mobile games and sales and marketing personnel. Building our brand appeal among the broader audience will be a key initiative in 2020. This strategy is yielding far-reaching market gains that we expect will have long-term benefits. We plan to continue to build on this momentum to further strengthen and expand our virtuous growth cycle. G&A expenses were RMB253 million, representing a 55% increase year-over-year. This increase was primarily due to increased headcount in general and administrative personnel and increased share-based compensation expenses. R&D expenses were RMB401 million, representing a 62% increase year-over-year due to increased headcount in research and development personnel. Net loss was RMB1.1 billion for the third quarter of 2020, compared to RMB406 million in the same period in 2019. Adjusted net loss, which is a non-GAAP measure that excludes the share-based compensation expenses and amortization expenses related to intangible assets acquired through business acquisitions, was RMB990 million compared to RMB343 million in the same period of 2019. Basic and diluted net loss per share were RMB3.08. Adjusted basic and diluted net loss per share were RMB2.76. As of September 30, 2020, we had cash and cash equivalents, time deposits, as well as short-term investments of RMB14.1 billion or US$2.1 billion, compared to RMB8.1 billion as of December 31, 2019. Our monetization capabilities continue to improve as we leverage our growing traffic base of new users across an increasingly broader spectrum of demographics. We will continue to add more premium content services to convert more paying users. We believe that in the long-term, our monetization efforts, high paying user conversion rate, and scale will yield improved bottom-line results. With that in mind, we are currently projecting net revenue for the fourth quarter of 2020 to be between RMB3.6 billion and RMB3.7 billion. Thank you for your attention. We would like now to open the call to your questions. Operator, please go ahead.

Operator, Operator

Thank you, everyone. We will now start the question-and-answer session. Your first question comes from Daniel Chen at JP Morgan. Daniel, please go ahead with your question. Your line is now open.

Unidentified Analyst, Analyst

Hi, this is Alex from JP Morgan. I have a question regarding user growth and the user profile of the newly added users. So you guys have been continuing to deliver very strong user growth in the past several quarters. Can you talk about the typical new user profile that you guys have acquired in recent quarters? And why exactly is the value that you offer to these guys to drive user growth? Also, lastly, what's the user growth outlook for the next one to two quarters?

Rui Chen, Chairman and Chief Executive Officer

The profile of the new users actually hasn't changed much compared to historical data. The average age of our users is about 21 years old, and the average age for new users is about 20 years old. We see a very balanced geographic mix, with about 50% of the users coming from 30 years and below. Notably, we've seen that the users above 30 are gradually increasing their contribution year-over-year. We've always attracted our users from our content. The reason users come to Bilibili is that they can find the type of content they like, such as animation, music, games, digital content, etc. Based on the data, we have experienced very fast user growth. On the quality side, we also maintain a very high quality of growth based on user retention, engagement, and the paying conversion rate. We are quite happy and satisfied with our high-quality growth because we have a very healthy self-sustaining ecosystem, which relies on our content creators continuously creating high-quality content. We are quite optimistic about the user growth trend as we look into the future. The video-lization trend, as a significant shift, positions Bilibili as a pioneer in the video community industry, leading us to anticipate continued high-quality growth. Mid-last year, we set a new user target to reach 180 million for 2020 and 220 million for 2021. We have already achieved this year's user targets, and we feel confident we will meet next year's targets in advance. We are likely to set and refresh our new user targets at the beginning of next year.

Operator, Operator

Your next question comes from the line of Yiwen Zhang from Citi. Yiwen, please ask your question. Your line is now open.

Yiwen Zhang, Analyst

Thanks management for taking my question. I have two questions regarding content ecosystems. Historically, Bilibili focused on documentaries and niche series and movies. Now increasingly, we see some premium content coming out, for example, variety shows and drama series. Can you share your thoughts on premium OTT and its role in our ecosystem? Secondly, if we take a step back, let's say the broad industry for short video is 100% competitive, where do you see Bilibili in terms of our user base? What ratio do you think that would be between QTV and OTV? What are the implications for content? Thank you.

Rui Chen, Chairman and Chief Executive Officer

Before we get into the strategy of our OGV business, I want to re-emphasize video as Bilibili's core business, which includes PUGV, OGV, and live broadcasting. The brand upgrade that we've been focusing on this year is proposing all the videos you like, which includes short-form video, long-form video, and mid-form video. We will continue to cultivate and reinforce content offerings and new video services based on users' needs, and we will also continue to invest in our OGV content. I want to emphasize that our PUGV content creator ecosystem remains the core of our business. From an engagement level and metrics, all data continues to show that we have a strong position in the PUGV ecosystem. The PUGV component will be Bilibili's unique advantage in running our OGV business. We will continue to focus on self-produced, self-publishing quality-driven, and IP-driven initiatives in our content ecosystem. We hope that Bilibili produced content will become synonymous with high-quality offerings. Bilibili began developing Chinese anime in 2017 and entered the self-production space for documentaries in 2018, variety shows in 2019, and live-action projects for internet users this year. We have already formed a comprehensive methodology for entering specific verticals. Currently, Bilibili has become the go-to platform for animation and documentary content, and users recognize that we excel in those categories. This year, our ventures into TV, movies, and variety shows, particularly "Run for Young" and "Rap for Youth," have received positive feedback, achieving high ratings across platforms. These projects mark our attempt at expanding into new content categories. Revenue from our premium membership as well as sponsorship and advertisement revenue related to these offerings have exceeded our expectations. We are confident in our ability to try out more new content offerings in these categories. The value of OGV for Bilibili is multi-faceted: premium memberships, advertising revenue, attraction of new users, and added value for our PUGV ecosystem. In the short term, we have already formed a virtuous cycle where premium membership revenue and ad revenue have significantly covered OGV content costs. Our operating cash flow for the first three quarters this year is positive. Our three third quarters have shown outstanding results, with 12.8 million premium members, which grew 110% year-over-year, and high-quality membership conversions. Sponsorship and advertising revenue tied to our OGV business have increased by 230% year-over-year. All our key projects have become valuable advertising outlets for brands. In summary, OGV has a critical strategic role in our business. High-quality OGV content greatly contributes to our user growth. For instance, "Carp Reborn" and "Run for Young" have drawn significant new users to Bilibili, and most of them remain on the platform for PUGV content. New OGV users demonstrate good retention. Additionally, "Rap for Youth" has been a successful endeavor for Bilibili, attracting a new audience to our platform.

Operator, Operator

Your next question in queue comes from the line of Binnie Wong from HSBC. Binnie, please ask your question. Your line is now open.

Binnie Wong, Analyst

First of all, congratulations on the amazing set of results and strong outlook. I noticed that the midpoint is ahead by 12%. I wonder if you can comment a bit on the competitive landscape. It was impressive to see advertising and live streaming continue to show triple-digit growth. However, there seems to have been a slight retreat in engagement metrics. If you look at the time spent in Q3, there's been a slight decline, and videos usually have been the strongest in recent years. What should we be aware of structurally, and how do you see the competitive landscape among the different entertainment platforms evolving, especially given some of your short video and live streaming competitors are becoming more aggressive in growing their advertising business?

Rui Chen, Chairman and Chief Executive Officer

Regarding user engagement metrics, we are seeing quite positive metrics from the time spent, which is 81 minutes in Q3 compared to 79 minutes in Q2 this year. Overall community engagement improved to 5.4 billion interactions versus 5.2 billion in Q2. Additionally, metrics for video usage per user daily are also improving. Therefore, we are still carrying out this high-quality user growth momentum in the third quarter. As for the competitive landscape, competition in the video business has always been fierce, whether between platforms A, B, C, or TV apps. Bilibili has withstood many players coming and going over the years. Importantly, we believe the trend of video-lization represents a huge market opportunity for the entire internet service industry. As a pioneer in this space, Bilibili is well-positioned to capture this market opportunity. In the advertising sector, the advertising value for specific platforms reflects user value. At Bilibili, we capture the best user metrics in terms of time spent, engagement, and user demographics. This is driving our advertising revenue growth. We also continue to improve our advertising efficiencies by launching innovative ad products, helping to re-accelerate our ad revenue. As our brand perception and strength continue to grow, Bilibili has become a must-invest platform for many advertisers.

Operator, Operator

Your next question comes from the line of Alex Poon from Morgan Stanley. Alex, please ask your question. Your line is now open.

Alex Poon, Analyst

Hi, Rui, Carly, and Juliet. I have translated my question: regarding the advertising business, we have seen year-over-year acceleration for several quarters now. Can you share the drivers behind this strong growth and what's the outlook for Q4 and 2021? Thank you very much.

Carly Lee, Vice Chairwoman of the Board and Chief Operating Officer

As Rui mentioned earlier, there are a lot of fundamental changes driving our advertising revenue. First, Bilibili's user base continues to deliver high-quality growth. About half of the young generation in China is active on Bilibili, making it a valuable demographic for brand advertisers. Additionally, brand advertisers can boost their brand perception and influence user buying decisions on Bilibili. With more high-quality content reaching mass market audiences, Bilibili has become the go-to platform for advertisers. We are continuously improving our advertising efficiencies, enhancing our data centers to support our commercialization efforts. We will also continue to roll out more innovative ad formats and products. Despite the challenging macro environment, Bilibili has delivered accelerated advertising revenue for five consecutive quarters. Looking into 2021, we will continue to enhance our overall integrated marketing capabilities and launch standardized and scalable integrated marketing solutions. We will also work on improving ad efficiency for vertical players, ensuring service quality across different advertising verticals. As for 2020, our advertising value is widely recognized by advertisers, and we are confident we can maintain this positive growth momentum into the next year.

Operator, Operator

Your next question comes from the line of Lei Zhang from Bank of America Securities. Lei, please go ahead and ask your question.

Lei Zhang, Analyst

Thanks, management, and congratulations on the strong results. I have two questions: first on sales and marketing, can you give us some breakdown for sales and marketing in Q3? What are the trends in the next one to two quarters? Secondly, I want to follow up on the competitive landscape. Have you observed short video platforms allocating a higher percentage to mini videos, and do you have any updates for us? Thank you.

Sam Fan, Chief Financial Officer

Let me take your first question. We have RMB14 billion in cash reserves and we achieved a positive operating cash flow in the first nine months of 2020. We have sufficient cash reserves to support our investments in various areas. As we previously mentioned, we pay close attention to the ROI of our marketing investments, including costs per activation, conversion rates, and retention. As we anticipated, we targeted to invest in user acquisition during Q3 through various channels including the App Store, video app channels, and OTT channels. We also invest in brand advertising to promote our new Bilibili video live. Additionally, we organized offline ACG-related events in different cities during the summer. As a result, MAUs grew by about 25 million quarter-over-quarter, surpassing 200 million. This was due in part to our investment in memberships and advertising, which has provided returns for our increased user base. However, we will not spend as much going forward. In terms of total selling and marketing expenses as a percentage of total revenues, we expect this to be lower than Q3 levels. We will focus on user retention and the conversion of paying users in Q4.

Rui Chen, Chairman and Chief Executive Officer

For your second question, I want to clarify the concept of mid-form video. We do not believe that users choose video content based on video length; rather it is about the quality of the content. It is easy to change video length, but it is challenging to create high-quality content that users enjoy. At Bilibili, we offer video lengths ranging from seconds to hours, each catering to different audiences. For different content categories, the length also varies. Music videos tend to be shorter than ten minutes, while gaming and lifestyle content may extend to hours. Thus, we do not consider this a matter of length but rather one of quality. Over the past few years, we have observed products focusing on short-form videos, enjoying decent growth rates. Still, Bilibili has also continued to demonstrate rapid growth driven by high-quality content. We believe that any product offering content fitting users' needs and interests can successfully capture their time. Bilibili's focus has always been on a content ecosystem-driven business model to meet users' interests in high-quality content. We regard our comprehensive video community as the future of video products, emphasizing scenarios and multi-screens.

Operator, Operator

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

Juliet Yang, Senior Director of Investor Relations

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