Earnings Call Transcript - BILI Q3 2023

Operator, Operator

Good day, and welcome to the Bilibili Third Quarter 2023 Financial Results and Business Update Conference Call. Today's conference call is being recorded. At this time, I would like to turn the conference over to Juliet Yang, Executive Director of Investor Relations. Thank you. Please go ahead.

Juliet Yang, Executive Director of Investor Relations

Thank you, operator. During this call, we'll discuss business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially from those mentioned in today's news release and in this discussion due to a number of risks and uncertainties, including those mentioned in our most recent filings with SEC and Hong Kong Stock Exchange. The non-GAAP financial measures we provide are for comparison purpose only. 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 Lee, Vice Chairwoman of the Board and Chief Operating Officer; and Mr. Sam Fan, Chief Financial Officer. And I will now turn the call over to Mr. Fan, who will read the prepared remarks on behalf of Mr. Chen.

Rui Chen, CEO

Thank you, Juliet, and thank you, everyone for participating in our 2023 third quarter conference call to discuss our financial and operating results. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. The record high committed growth we achieved in the third quarter is a testament to the power of our self-driven content ecosystem. This continuity draws in more users and keeps them highly engaged. Notably, our DAUs increased by 14% year-over-year, surpassing the 100 million milestone and landing at 103 million in the third quarter. MAUs also grew to a record high of 341 million, and the DAU to MAU ratio in this quarter improved to 13.2%. Meanwhile, our user daily time spend also reached a historical high of 100 minutes with total user time spend increasing by 19% year-over-year. We are encouraged by the strong user growth momentum and the direct correlation with our monetization efforts. Improving margins, narrowing losses, and maintaining growth have been our key objectives this year. In the third quarter, we leveraged our expanding traffic more efficiently, integrating commercializations in near rails and products in our content ecosystem to drive quality growth. This is evident in our advertising and VAS business, which grew by 21% and 70% year-over-year, respectively. Furthermore, our gross profit increased by 38% year-over-year, and our gross profit margin rose to 25%, up from 18% in the same period last year, marking the fifth consecutive quarter of gross margin improvement. Our target expense control measures reduced our total operating expenses by 12%, including a 19% decrease in sales and marketing expenses, an 8% decrease in G&A expenses, and a 6% decrease in R&D expenses on a year-over-year basis. As a result, our adjusted operating loss and adjusted net loss both narrowed by 51% year-over-year in the third quarter. Notably, we achieved an important milestone of generating positive operating cash flow in the third quarter, demonstrating our business operations have entered a positive cycle and taking a step forward towards our profitability goals. 2023 has been a year with continued changes across industries and markets. To adapt to the new paradigm, we are increasing our focus on our core business. Trading expenses in areas that yield lower returns. In the fourth quarter, we have further streamlined our organization and expect our total headcount to be around 9,000 by the end of 2023 compared with 11,000 at the end of 2022. Additionally, future project plans will continue to be ROI focused. With these measures, we will become more agile as an organization to better align ourselves with the new environment, positioning Bilibili for long-term success. With that overview, let's look at our core pillars of content, community, and commercialization in more detail. Beginning with content and community, the key metrics that represent the quality of our community continued to rise. The number of daily active content creators on our platform increased by 21% in the third quarter, and the monthly new content submissions were 21 million, up 37%, both year-over-year. More content creators and a wider fan base emerged during the third quarter. The number of content creators with over 10,000 followers grew by 36% year-over-year. Total daily video views increased by 26% year-over-year to 4.7 billion, among which story mode video views grew by 45% year-over-year. As I mentioned, users are spending more time with us than ever before, with user daily time spend reaching an all-time high of 100 minutes. Meanwhile, monthly interactions among our users also increased by 18% year-over-year, reaching 17 billion. By the end of the third quarter, we had 224 million members who have taken and passed our community event, a 23% increase year-over-year. Our 12-month retention rate remained strong at around 80%. Our content categories continue to expand, attracting more users and bringing new commercial opportunities for both content creators and the platform. Inevitably, our users and content creators are entering new life stages and new categories are emerging, such as home decoration, relationships, well-being, and automotive. For example, new content submissions in home decoration and appearance genres grew by nearly 19% year-over-year in the third quarter. In parallel, content creators in this category and their earnings, as well as advertising revenues generated from the same category, have all significantly improved. Meanwhile, we have created more direct monetization opportunities for our content creators, with a total of 1.68 million content creators generating income on Bilibili in the third quarter, up 34% from the same period last year. The adoption of video and live e-commerce has also brought additional channels for more creators to realize their commercial value. The number of content creators who earn money through video and live commerce in the third quarter grew by over 160% year-over-year. Additionally, this summer, our two signature offline events, Bilibili World and Bilibili Macro Link, attracted a gathering of over 200,000 young people in Shanghai to experience our unique community culture. The remarkable attendance underscores Bilibili's influence among the young generation and brought us more brand advertisers with incremental budget allocation. Lastly, I'd like to talk about commercialization. Total revenue for the third quarter was RMB 5.8 billion, flat year-over-year. Advertising revenues and VAS revenues increased by 21% and 17% year-over-year, while offset by a 33% year-over-year decrease in game revenues. We are encouraged by the progress in our advertising and VAS business, where the revenue growth potential has a direct correlation with DAU growth. Meanwhile, we have taken a closer look at our game business and made certain adjustments to better align ourselves with the new industry landscape. Looking at this in more detail, our growing and engaging community is the foundation of commercialization. As people spend more time and engage in more activities, they are more willing to pay for Bilibili content and services. Looking at our VAS business, VAS revenue for the period increased by 17% year-over-year to RMB 2.6 billion, mainly led by our live broadcasting business. The ongoing integration of live broadcasting into our video universe continues to yield results. More content creators are stepping into live broadcasting as hosts, further enriching our live broadcasting offerings and enabling them to earn income. By the end of September, our premium members grew to 21.1 million, with over 18% on annual subscription or auto-renewal packages, underscoring the trust and loyalty we have built with our brand. In the third quarter, we launched the highly anticipated self-produced anime, Link Click Season 2, which was well received by many new and old fans. In September, we announced 68 new Chinese anime titles at our six made by Bilibili Chinese anime press event. Both of these titles will be released in the next few years, ensuring a continued strength of the beloved content for our premium members. Turning to our advertising business, as we further integrate sales conversion tools within our ad products across scenarios, we are now more effectively converting our high-quality traffic into substantial ad revenue growth. In the third quarter, total advertising revenues grew by 21% year-over-year, reaching RMB 1.6 billion, mainly led by performance-based ads, which grew by over 40% year-over-year. Notably, our strong ad revenue growth contributed to meaningful gross profit growth, with higher revenue contribution from our performance-based ads. For the third quarter, our top five asset verticals were games, digital products and home appliances, e-commerce, food and beverage, and automotive. Despite the third quarter traditionally being an off-peak season for e-commerce advertising, our strengthened advertising solutions enabled us to secure a greater share of advertising budgets in this competitive industry. During the Double 11 shopping festival in the fourth quarter, we further strengthened our data collaboration with e-commerce platforms and upgraded our video and live commerce products. The total GMV from our videos and live commerce products increased by over 250% year-over-year for the Double 11 shopping season. Turning to our game business, total revenues were RMB 992 million, representing an increase of 11% quarter-over-quarter and a decrease of 33% year-over-year. The reason for the year-over-year decrease was due to a high base from the 2022 summer release of Space Hunter 3, as well as weaker-than-expected new game performance in the third quarter this year. Our legacy games, Azur Lane and FGO, remained stable during the period. On August 30, 2023, we launched our exclusive licensed ACG titled Pretty Derby. On September 8, 2023, the game was temporarily removed from the App Store for content refinement, and we are working diligently to resume download access as soon as possible. The game industry has changed dramatically in the past two years. At the beginning of the fourth quarter, we closely reviewed our in-house game development projects. We further streamlined our in-house development team and discontinued projects that did not meet our standards. Consolidating these operations will help reduce our future R&D expenses. That said, as a video community for the young generation, we possess natural advantages in the game industry. We aim to further leverage our growing advertising capabilities to strengthen our game distribution power as well as selectively invest in our in-house development to bring high-quality games to our users and create value for our business partners. In summary, we are dedicated to reaching our financial goal of gross profit improvement and a loss reduction this year. We have delivered on this goal with a 38% increase in gross profit and a 51% reduction of both adjusted operating loss and adjusted net loss in the third quarter, and we will continue on this path. At the same time, we strongly believe in the power of good content and community. 100 million DAU is just another beginning for us to build upon. We will stay true to our mission and continue to enrich the lives of the young generation in China. This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the third quarter of 2023. As mentioned in Mr. Chen's remarks, our financial profile has significantly improved. We continue to gain operating leverage while building our community and video ecosystem. We have increased our gross profit margin and narrowed our adjusted net loss for five consecutive quarters. Total net revenues for the third quarter were RMB 5.8 billion, on par with the same period last year. Our total net revenues, broken down by revenue stream, were approximately 45% VAS, 28% advertising, 17% mobile games, and 10% from our IP directives and other business. Our cost of revenues decreased by 8% year-over-year to RMB 4.4 billion, driving our gross profit to RMB 1.5 billion, up 38% year-over-year. Our gross profit margin reached 25%, up from 18% in the same period last year. We expect our gross profit margin to continue to improve in the fourth quarter. Our total operating expenses were down 12% year-over-year to RMB 2.6 billion. In the third quarter, we cut our sales and marketing expenses by 19% year-over-year to RMB 992 million, while our DAUs reached a record high. Sales and marketing expenses were 70% of total revenue compared with 31% in the same period last year. G&A expenses were RMB 499 million, down 8% year-over-year. R&D expenses were RMB 1.1 billion, down 6% year-over-year. As a result, we narrowed our adjusted operating loss and adjusted net loss both by 51% year-over-year in the third quarter. Our adjusted net loss ratio in the third quarter was 15%, improving from 30% for the same period a year ago. Notably, we generated positive operating cash flow in the third quarter, demonstrating our business operations have entered into a positive cycle. As of September 30, 2023, we had cash and cash equivalents, time deposits and short-term investments of RMB 14.5 billion or US$2.0 billion. In the third quarter, we repurchased an aggregate principal amount of US$14.5 million December 2026 notes with an aggregate cash consideration of US$13 million. As of September 30, 2023, the aggregate outstanding principal amount of April 2026 notes, 2027 notes and December 2026 notes was US$862 million. We believe our cash position is sufficient to cover all of our remaining convertible bonds, due to lower than expected GAAP revenues. We now expect our 2023 full year revenues to be at the lower end of RMB 22.5 billion to RMB 23.5 billion. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Operator, Operator

We will now begin the question-and-answer session. Our first question comes from Zhang Xueqing from CICC. Please go ahead.

Zhang Xueqing, Analyst

Good evening management. Thanks for taking my question and congratulations on the third quarter. My question is about user growth. As the deals surpassed the milestone of 100 million for the first time in the third quarter and user time spent reached a historical high as well, what are your views on user growth potential? Recently, media reports indicated that the company has internally proposed a goal of doubling daily active users. Can management share the path and timetable for achieving this goal? Does it require increased expenditure in user acquisition? Thank you.

Rui Chen, CEO

I believe that in terms of user utilization, a strong video product naturally grows on its own. Therefore, in our discussions about user growth strategy, we have been focusing on enhancing content quality and the user experience, rather than just increasing user acquisition. Since the second quarter of last year, we have been highlighting the return on investment from our user acquisition efforts. As we reduce our sales and marketing expenses, we continue to see our daily active users increasing. This is why we are concentrating on improving operational efficiency and product capabilities while fostering simultaneous commercialization and user growth in a positive feedback loop. In the third quarter, we exceeded 100 million daily active users and set new records for monthly active users. This demonstrates the success of our user growth strategy over the past year and signifies the start of a new chapter for us. We prioritize user growth because a larger user base is a key competitive advantage for internet products. A greater user base attracts more content creators and leads to increased commercialization. Our commercialization strategy shows that advertising and live broadcasting revenues correlate directly with daily active user growth. In the third quarter, our advertising revenue and value-added services revenue grew by 21% and 17%, respectively. We have now established a positive cycle between traffic growth and revenue growth in advertising and value-added services, specifically in live broadcasting. Moreover, the revenue generated from these two areas also benefits our content creators, which in turn stimulates content creation on our platform. This has been favorable for our overall content ecosystem. We still see significant growth potential for our user base. User research indicates that there is a strong word-of-mouth effect among Bilibili users. They appreciate the product and naturally recommend it to others. Our data from the past year shows not only substantial user growth but also improvements in community growth metrics, video views, and content creator counts. This reflects a positive cycle among content users and the community. With the ongoing success of our content ecosystem, I believe Bilibili will continue to attract more users, as people naturally seek out quality content and brands aligned with their interests. Moving forward, we will primarily depend on product enhancements and content expansion to drive user growth, while adopting a return-focused approach to sales and marketing, making investments in user acquisition only when the ROI justifies it. This approach aims to attract users who will contribute to revenue, forming our mid to long-term user growth strategy. At the end of last year, I outlined three key objectives for the company, which are margin improvement, loss narrowing, and maintaining growth. We aim to achieve these targets simultaneously, without compromising the first two to achieve the last one. Thank you.

Juliet Yang, Executive Director of Investor Relations

Operator, next question, please?

Operator, Operator

One moment for the next question. Next question comes from the line of Fang Wei from Mizuho. Please go ahead.

Fang Wei, Analyst

Can management elaborate on the key drivers for the ad business, particularly ERS in the quarter? How did performance fare during the Double 11 promotional campaign? Additionally, could you provide an update on your progress with live streaming e-commerce and short video e-commerce? Finally, how should we anticipate segment growth for 2024? Thank you.

Rui Chen, CEO

In the third quarter, our advertising revenue grew by 21% year-over-year. Ad revenue as a percentage of total revenue has grown from 23% in the same period last year to 28% in the third quarter of this year. This has positively driven the gross margin and gross profit improvement at the company level. We have introduced our key strategy and driving forces of our ad business over the past two quarters, which have been one horizontal industry solution as well as the middle platform power improvement. From an industry vertical perspective, gaming and e-commerce have been very strong despite Q3 being a traditional off-peak season. Ad revenue from e-commerce still grew by 90% year-over-year. Additionally, we have been actively exploring integrated solutions with other industries. For example, we’ve seen positive performance from the automotive and healthcare industries, which also grew by 20% quarter-over-quarter. Going forward, we will continue to strengthen those industries' performance. We have also improved our ad efficiency at the platform level, enabling more commercial value across different scenarios. Particularly, performance-based ads grew by 40% year-over-year in the third quarter, becoming the main growth driver of our ad business. Regarding our performance during the Double 11 shopping festival, we are very pleased. The overall experience and performance exceeded our expectations. Ad revenue from the main e-commerce platforms grew by over 80% year-over-year. We will continue to implement our open-loop strategy and deepen our data collaboration with the top e-commerce platforms. For example, ad revenue generated by the Jinko project grew over 160% compared to the June 18 shopping festival. We've worked with more than 70 brand advertisers to bring in new users for the advertisers. Over 50% of the traffic converted to the Alibaba Jinko project were new users to those brands, and this ratio even reached 89% in the baby and maternity verticals. The incremental ad budget brought in by the Alibaba Jinko project has proven the conversion value of Bilibili's performance ads. In addition to the Alibaba Jinko project, we recently launched our collaboration program with Jindal. During the 11.11 shopping festival, the GMV generated from our video and live e-commerce increased more than 250% year-over-year. We have gradually built a consumption and trading atmosphere within our content community. During the shopping season, the number of video-commerce related videos increased by over 230%, and the number of live commerce sessions grew by 100%. Our Bilibili content creator's live e-commerce GMV reached 81.68 billion, which increased by over 400%. Given this trading atmosphere and revenue growth, we are confident we can continue to build on this momentum and continue to grow our e-commerce-related advertising revenue. Regarding our advertising revenue growth trajectory for Q4 and into 2024, we remain confident. Here are some ways we hope to continue enhancing and improving: First, we all know Bilibili's content can deeply influence users' mindsets and brand perceptions. We will remain focused and continue to build our brand ad capabilities, leveraging our Spark platform, which will deliver performance-based ads as our growth accelerator. Secondly, we will continue to upgrade our advertising model. We've been emphasizing that integrated marketing solutions will be Bilibili's strong advantage. We can reach users across multiple media scenarios and achieve multiple ad revenue growth. In 2024, we will continue to upgrade and help our ad clients build their brand equity within the Bilibili content community, assisting them in creating a sustainable and measurable growth model. Thirdly, we will focus on improving the effectiveness and efficiency of our traditional ad scenarios and explore new scenarios suitable for different advertising strategies. Moving forward, we will strive to find ways to better collaborate between natural traffic and commercial traffic to improve our overall ad efficiency. Lastly, we will pay close attention to the four key needs of our brand advertisers: new product launches, fear of staging, transaction-based ad needs, and seasonal marketing campaigns. We will base our advertising solution on these four key needs, and thus, I remain very confident in our advertising revenue growth for the fourth quarter and into the following year, as we aim to continue expanding our market share.

Juliet Yang, Executive Director of Investor Relations

Operator, next question.

Operator, Operator

We'll move to the next question. Our next question comes from the line of Felix Liu from UBS. Please go ahead.

Felix Liu, Analyst

Let me translate myself. My question is about the game business. We've observed that the gaming landscape remains very competitive, especially with Tencent, one of our competitors, recently leaving the industry. What can you share about the progress of your in-house game R&D? How do you envision the future of the game business, and do you have any updates on our game Pretty Derby? Thank you.

Rui Chen, CEO

Regarding Pretty Derby, we truly value this game and at the same time, we value user experience. This is why we will conduct minor content refinement and technical upgrades as soon as possible to bring the game back to the App Store. One thing I want to add is that for users who have already downloaded the game, the feedback and experiences have been very positive. As you mentioned, there has been a very competitive landscape in the game market this year. It is more than that; we think the overall game business or industry has entered a new space where it is very hard to gain new users, making it a much more saturated market. Over the past year, while we still see incremental growth in gamers, the secret to success now is to bring a high-quality game. In a saturated market, having only quality is not enough unless you have top-tier game quality and the right timing. As we approach the end of this year, we have noticed that most of the new games launched this year have not met their original expectations. This is not due to the quality of the games, but rather because the games were set up three years ago when there was still incremental growth among gamers. Their targets were simply to build a good game, not necessarily the top game or the most unique game. Three years later, the time has changed. From the user perspective, they notice that there are many new games available this year, but many of them look quite similar, probably only differentiated by their artistic designs. This has led game developers to enter a rat race focused on minor details. However, these minor adjustments do not necessarily yield new users, new income, and new profits. They may choose not to try out a new game that looks similar to others if they are already attached to a game they enjoy. This does not indicate that the game market is shrinking or becoming less active; on the contrary, we observe that gamers on Bilibili are highly engaged based on our data. Our viewers within our game content verticals, including DAUs and their time spent are increasing significantly. They also pay close attention to new games, but these new games must be unique and different from the current market offerings to genuinely attract new users. Thus, we believe the standards for investing in new games have shifted. Now we identify three key criteria for a new game to succeed: long-term operations, being top-tier in a niche market or among the best titles in the market, and focusing on ROI. Previously, copycat-type projects or the rat race type of R&D investments may not work anymore. This is exactly why we have been reviewing and adjusting our in-house development projects. Some projects were initiated based on the old standards and, given the current market's evolution, these projects risk being loss-making when they come online. This is why we are making these adjustments and streamlining our projects. After adjusting our in-house development game approach, we still have a few titles that we believe will remain competitive in the current market. We will pay close attention to the capital allocated and focus our limited resources on selective titles that can meet the new standards. We believe the steps we're taking regarding project adjustment are correct. This movement is not only being implemented by Bilibili but is occurring across the industry; and it's not necessarily a negative development. We are returning to the fundamentals of game development, recognizing that true competitiveness in this industry relies on innovation and that the most successful teams will be those with the most brilliant ideas and innovation in game design. Lastly, I want to emphasize that Bilibili's platform has a large number of young users, and young gamers are highly engaged on our platform. Bilibili remains the most popular game video content platform in China with a high density of the young generation. Our game development team profoundly understands Chinese gamers. What we need to do is leverage those advantages and translate that into effective game development.

Juliet Yang, Executive Director of Investor Relations

Thank you, operator. Next question, please?

Operator, Operator

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

Zhang Lei, Analyst

Thank you for addressing my question about margin. You mentioned that we have seen significant improvement in gross margin. Can you provide some insights on our outlook for Q4? How do you assess our overall loss control target for the year? Have there been any updates to our breakeven target for 2024? Thank you.

Sam Fan, CFO

Okay. This is Sam. I will take this question. In Q3, our gross profit grew by 38% year-over-year, and our gross profit margin improved for five consecutive quarters to 25%. We expect our gross profit margin can continue to improve sequentially in Q4, as there is more revenue contribution from ad revenue. At the same time, we narrowed our non-GAAP operating loss by 31% in Q3, and we expect to narrow our non-GAAP operating loss even further in Q4 compared to Q3. This will help us achieve our initial financial target of reducing our non-GAAP operating loss by RMB 3 billion in 2023. So, we keep our initial financial goal unchanged. Notably, our operating cash flow has been positive in Q3, indicating our business operations have entered into a positive cycle. We expect to continue generating positive operating cash flow in Q4. Looking to 2024, we will continue our path of gross profit improvement and loss narrowing. We are confident in the growth of our high-margin business, like advertising revenue, which will continue to contribute to gross profit growth and drive loss reduction. Additionally, some recent structured adjustments will further lower our operating expenses, including R&D expenses in 2024. Together, I believe we will continue to work toward our breakeven goal. Thank you.

Juliet Yang, Executive Director of Investor Relations

Thank you, Sam and management.

Operator, Operator

Thank you for the questions. And that concludes the question-and-answer session. Thank you once again for joining Bilibili's Third Quarter 2023 Financial Results and Business Update Conference Call today. If you have any further questions, please contact Juliet Yang, Bilibili's Executive IR Director, or Piacante 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.