Earnings Call Transcript - BILI Q2 2020

Operator, Operator

Good day and welcome to the Bilibili 2020 Second 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 purposes only. For a definition of non-GAAP financial measures, and a reconciliation of GAAP to non-GAAP financial results, please see the 2020 second 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 second quarter conference call. I’m pleased to deliver today’s opening remarks on behalf of Mr. Chen. The second quarter was another strong quarter of growth for Bilibili. Owing to our increasingly diverse content and wider awareness of our brand, we are reaching a much broader audience. For the second quarter, MAUs were 172 million, up 55%, and DAUs were up 52% to 51 million, both on a year-over-year basis. Mobile MAUs continued to be our fastest grower, reaching 153 million in the period, up 59% compared to the same period in 2019. Along with the expanded user base, user engagement continues to be strong. In the second quarter, our users spent an average of 79 minutes per day on our Bilibili app, making us one of the most popular platforms among our peers. As we move into our peak summer season, with solid execution of our initiatives, we’re looking forward to further building on our user growth momentum. We continue to roll out more premium content and services, strengthen our monetization capabilities, and we are increasingly converting traffic to paid users. Our MPUs were up 105% year-over-year, reaching 12.9 million in the second quarter, and our paying ratio improved to 7.5%, compared to 5.7% from the same period last year. These increases fueled our top-line growth and we once again reached record high revenues of RMB2.6 billion, beating the high-end of our guidance. Our gross margin expanded to 23% from 16% in the second quarter of last year as we continued to realize more operating leverage. We remain committed to our user growth focused strategy. After 11 years of cultivation, we believe our content pool is deep and diverse enough to accommodate a much larger user base, and our community is friendly and robust enough to retain those newcomers. Hence, we have made more proactive user growth plans. Our primary areas of focus are on creating additional brand awareness and targeted channel acquisition. In the second quarter, we launched a series of campaigns aimed at spreading the Bilibili brand name among a broader audience, in tandem with expanding our content appeal to a mass market. During our 11-year anniversary, we introduced a new slogan Bilibili - All the Videos You Like, helping to define our brand proposition and appeal to a wider base. With this vision in mind, we launched a branding campaign series that started with our blockbuster New Year’s Eve gala in the first quarter, followed by the Hou Lang, Ru Hai, Xi Xiang Feng trilogy videos, which have all been widely successful, and we are seeing a clear uptick in brand perception and brand awareness across different demographics. This strategy is working well for us and we are determined to carry on as we move into the summer peak season. Looking ahead, a number of positive industry trends are working in our favor. The adaption of a faster network and smarter hardware is making content creation easier and more accessible to everyone. Particularly, the video industry is emerging as the biggest beneficiary. Video is rapidly becoming the most interactive and influential method to convey information. Building on a decade of experience and leadership in the video community, we are well positioned to capture the growth opportunity. With that overview, I would like to walk through the latest updates of our content, community, commercialization, and strategic growth plans. First, our content. Our PUGV ecosystem remains the cornerstone of our business. For the past decade, we have carefully cultivated our PUGV community, and risen as the clear industry leader. Our effective traffic distribution mechanism and friendly community environment make Bilibili an increasingly attractive platform for content creators. In addition to easy-to-use tools that make the content creation process simpler and more accessible, we launched our new ad platform to bring more commercial opportunities to our content creators. For the second quarter, we had approximately 1.9 million content creators uploading 6 million videos per month, representing increases of 123% and 148%, respectively, both year-over-year. For the second quarter, our most heavily trafficked verticals were Lifestyle, Game, Entertainment, Animation, and Tech and Knowledge. With rapid trends in video content, newcomers and key opinion leaders from other platforms are turning to Bilibili. In the first half of 2020, the number of content creators who submitted their first video creation trial grew by 139% year-over-year. These creative minds open Bilibili up to expanded content categories. For instance, we officially launched a Knowledge Sector to encourage content creators to share their insights such as business stories, how-to skills, and professional experiences. With our effective operational campaigns and welcoming community atmosphere, Knowledge has quickly become the fastest-growing sector and we have seen excellent traction. Turning to our OGV, we remain the dominant leader in the animation field with one of China’s largest anime libraries. Since the beginning of this year, there were three new Chinese animes that joined our 100 million video views club, including White Cat Legend, and our self-produced The Daily Life of the Immortal King and Carp Reborn. Additionally, we plan to roll out more Bilibili-produced Chinese animes, including Ling Cage, A Mortal’s Journey, and Legend of Tang. We believe these new series will attract even more Chinese anime lovers to our platform this summer. As a supplement to our vast content library, we expanded variety shows and documentaries that continued to resonate with fans and provide good advertising avenues to our business partners. In August, we were excited to introduce our very first self-produced music variety show Rap for Youth, sponsored by Alibaba’s Juhuasuan. We hope this rap-themed talent show will help further expand our content offerings while inspiring our content creators and young generations alike. In the documentary department, we are pleased to have received wide recognition, not only from our users but also professional institutions. Two of our Bilibili-produced documentaries were nominated for the Best Documentary Award, including And Yet the Books and Police Stories. The Hidden Kingdoms of China, a documentary that we co-produced with National Geographic, was nominated as the Best Limited Series – Long Form Documentary by Jackson Wild Media Award. Turning to our community, our community size and engagement have been accelerating rapidly. Our platform is more robust than ever, and we are seeing record highs across all of our primary engagement metrics. In the second quarter, our daily video views reached 1.2 billion, up 97% year-over-year. Our users generated nearly 5.2 billion monthly interactions through bullet chats, comments, likes, and Bilibili moment posts, nearly three times the amount from the same period in 2019. Our official membership program is on a similar growth track. By the end of the second quarter, we had 89 million official members who passed our 100-question exam, up 65% year-over-year. Retention for this group remains well above 80%, demonstrating the loyalty of our users. Turning to our commercialization progress, I’ll first review the status of our game business. Revenues from our mobile games business were up 36% year-over-year to RMB1.2 billion, accounting for 48% of our total revenues. Building on our massive and expanding gamer community, our distribution power in the ACG sector is becoming even stronger. In the second quarter, we were excited to add the new blockbuster title Princess Connect Re: Dive to our game portfolio. This exclusively licensed Japanese RPG was an instant hit after its release in April and topped China’s iOS download and grossing charts multiple times. Our legacy title Fate Grand Order, or FGO, continues to hold a considerable draw for its stable fan base. At the end of June, we were excited to celebrate Azur Lane’s three-year anniversary with a major content update and accompanying offline activities. The long life cycles of these games continue to be a strong testimony to our ability to operate and sustain high-quality games. Looking at our game pipeline, currently, we have 11 games that have acquired approvals and are scheduled to be released in the coming months. These include Magia Record, a highly-anticipated ACG title adapted by a popular Japanese anime, and Sword Art Online: Integral Factor, an exciting MMORPG. Additionally, while strengthening our ACG game operation, we continue to expand offerings in high-quality games. At the end of July, we hosted our first-ever game release event Enter Your Fantasy World, where we introduced 11 exciting titles across different genres. These included the simulation game Dark Boom, a self-developed ACG game; Incarnation: Huo Zhong, a highly anticipated title adapted from our self-owned Chinese anime IP; and several high-quality ACG titles, Lapis Re:LiGHTs and Artery Gear. In August, we are delighted to announce we are going to bring Chinese audiences the mobile version of Fall Guys: Ultimate Knockout, an exciting Battle Royale game. As we solidify our game-related content offerings and welcome more game lovers to our platform, Bilibili has become the go-to place for joint operating partners. In the second half of the year, we will continue to work with leading game developers to bring our users premium games such as Mihoyo’s version and NetEase’s Harry Potter. Turning to our VAS business, revenues from VAS increased by 153% year-over-year reaching RMB825 million in the second quarter. Our growth was mainly driven by increased contribution from premium memberships, live broadcasting, and other value-added services. We continued to enrich our live-broadcasting content and increase the penetration among our growing traffic. As our platform becomes more influential in China’s online entertainment industry, we have seen more hosts and talent agencies turning to Bilibili to grow their fan base and maximize their commercial potential. On the e-sports front, our three-year strategic partnership with Riot Games will significantly enhance our position in this area. We will join forces with Riot Games and local government to host diversified online and offline activities to promote the world-renowned League of Legends World Championship event, while bringing more e-sports lovers to Bilibili. Our premium members, which offer additional exclusive or advanced content to paid users, continued to flourish in the second quarter. By the end of June, we had 10.5 million premium members, up 100% year-over-year. These members represent the golden cohort of our most loyal users, who are also the most primed for future cross-selling opportunities. Notably, our comic business is also on the rise. Within two years, Bilibili Comic has grown from scratch to the top 3 comic platforms in China, with over 1 million paid subscribers. As a natural extension from our core ACG content offering, we see great synergy between our main app and Bilibili Comic app with significant room to grow. As for our advertising business, our growing user base and increased brand awareness make Bilibili a must-go-to platform for advertisers. Despite the tough macro environment, we grew our advertising business to RMB349 million, up 108% year-over-year and continued to broaden our customer base. The leading industry verticals in the period were games, e-commerce, 3C products, food and beverage, and education. In summary, we had another strong quarter of growth and we are well poised to continue on this trajectory. Building on the positive momentum in the first half of this year, we plan to make additional investments in branding and channels in the coming quarters to further drive user growth and raise brand awareness. We believe these investments will boost our self-fulfilling growth cycle and yield considerable return in the long run. As we reach new heights, our focus will remain on the quality of the growth and we will continue to closely monitor the ROI of our marketing expenses. We are confident that our effective strategic initiatives will further fuel our user growth and support our top-line expansion and we continue to build value for our company, investors, and the growing community of our users. This concludes Mr. Chen’s remarks. I will now provide a brief overview of our financial results for the second quarter of 2020. Our total net revenues increased by 70% year-over-year to RMB2.6 billion, exceeding the high end of our guidance. With our games accounting for just under half of our total revenues, we are pleased with the commercialization progress of our non-game offerings and our ability to convert our online traffic into paying users. The average number of monthly paying users increased by 105% year-over-year, reaching 12.9 million in the second quarter. Cost of revenues increased by 57% year-over-year to RMB2 billion. Revenue-sharing cost, a key component of cost of revenues, was RMB1 billion, a 79% increase from the same period in 2019. Gross profit increased by 130% year-over-year to RMB604 million. We’re also starting to see operating leverage from our diversified revenue streams. With more revenue contribution from our higher margin businesses, as well as additional income from paying users, our gross profit margin continued to improve, reaching 23% in the second quarter. Total operating expenses increased to RMB1.2 billion, up 103% from the same period in 2019. Selling and marketing expenses were RMB675 million, representing a 181% increase year-over-year. The increase was primarily attributable to the increased channel and marketing expenses associated with Bilibili’s app and brand, as well as expenses for the Company’s mobile games and selling and marketing personnel. G&A expenses were RMB208 million, representing a 48% increase year-over-year. The increase was primarily due to increased headcount in G&A personnel and increased share-based compensation expenses. R&D expenses were RMB331 million, representing a 53% increase year-over-year. The increase was primarily due to increased headcount in research and development personnel and increased share-based compensation expenses. Net loss was RMB571 million for the second quarter of 2020, compared to RMB315 million in the same period of 2019. Adjusted net loss, which is a non-GAAP measure that excludes share-based compensation expenses and amortization expense related to intangible assets acquired through business acquisitions, was RMB476 million, compared to RMB256 million in the same period of 2019. Basic and diluted net loss per share were RMB1.63. Adjusted basic and diluted net loss per share were RMB1.35. As of June 30, 2020, we had cash and cash equivalent time deposits as well as short-term investments of RMB15.6 billion or US$2.2 billion compared to RMB8.1 billion as of December 31, 2019. For the third quarter of 2020, we’re currently projecting revenue to be between RMB3.05 billion and RMB3.10 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 begin the question-and-answer session. Your first question comes from Alex Poon from Morgan Stanley. Alex, please ask your question; your line is open.

Alex Poon, Analyst

My first question is about user growth. In the first half, user growth has been very strong. Can you share insights on the quality, retention, and user profile of the new users during this period? Additionally, what are your expectations for the second half growth and next year's user growth strategy? How will you manage user retention while maintaining rapid user growth in the second half of next year? Thank you.

Rui Chen, Chairman of the Board and Chief Executive Officer

I will translate for Mr. Chen. Last year, we reinforced our commitment to user growth as our key strategic focus, and we have effectively implemented this strategy throughout the first half of the year, achieving very positive results. Regarding the new user profile, there hasn’t been a significant change; we continue to see many new young users, with the average age of our new users being around 20 years old. However, we want to highlight that during our user growth phase, we prioritize quality over quantity. The quality of our users is evidenced by an average daily usage of 79 minutes per day, monthly user engagement reaching 5.2 billion, and daily video views hitting 1.2 billion. These figures demonstrate that not only are our users growing rapidly, but they also possess high quality. Importantly, we have observed an increased ratio of new users who joined during the first half of this year and subscribed to our services compared to the same period last year. Additionally, new users from 2017, 2018, and 2019 have remained active and paid, with an increasing percentage of them continuing to subscribe. This set of numbers strongly supports the quality of our new user growth. We would also like to emphasize the approach we take to user growth. Our confidence in the user growth trajectory is rooted in our belief that we attract users with content and retain them through community engagement. In the first half of this year, we made significant strides in extending our content’s reach to a broader audience, and we recognize that such growth cannot just be achieved through channel or user acquisition alone. If users join our platform solely because of these acquisitions, they may not stay without appealing content. Therefore, our core strategy focuses on expanding our content offerings to encompass a more diverse array of interests, which helps us tap into new demographics. Bilibili thrives as a community with high engagement and retention; even as our user base has expanded greatly, our community remains cohesive and sticky with a strong retention rate. I’ll now share our user growth plan timeline. During Q1, the pandemic allowed people more free time, providing us an excellent opportunity to invest in user growth. As people returned to work and school in Q2, we transitioned to a more stable environment, where our focus shifted to improving retention and converting users into paying customers. Notably, we made significant strides in enhancing our brand recognition in the second quarter, yielding positive results. Traditionally, Q3 is a peak season for us, and we plan to invest further in both brand and channel acquisition efforts. Additionally, our branding campaigns in Q2, starting from May, proved to be very successful, particularly our trilogy marketing campaign. We believe this series stands out as the most effective branding initiative among Chinese Internet firms during that quarter, showcasing our capability to engage the youth and reach a broader audience. Emphasizing branding ties back to our business model, where we leverage our content to attract users and our community to retain them. As our content continues to evolve, it is crucial to inform more people about the vast array of content Bilibili offers, aligning with our new brand slogan, Bilibili Positive. For our Q3 user outlook, we anticipate historic highs this quarter. This summer is unique as well; in July, most students return to school, and August marks the height of summer vacation. September signals the return to school for students. We believe we can achieve a significant monthly active user target in August and establish historical highs on a quarterly annual basis, expecting to exceed RMB200 million in revenue for a single month during Q3.

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

Carly would like to supplement a few points. During our brand upgrade campaign this year, our overall brand exposure has achieved over 5 billion impressions and the brand recognition level among those aged 17 to 35 has increased to 60%. In the second half of the year, our main focus will be on converting people from recognizing the Bilibili brand to becoming Bilibili users. Our marketing campaign will concentrate on key activities during important time periods such as summer vacation, back-to-school season, the League of Legends World Championship, and our New Year’s Eve Gala, as well as various activities that resonate with the younger generation. We aim to create new content and brand campaigns to further drive our user growth.

Operator, Operator

Our next question comes from the line of Lei Zhang from Bank of America Merrill Lynch. Lei, your line is now open.

Lei Zhang, Analyst

Thanks, management, and congratulations on the strong results. My question is regarding your game business, which performed well in the second quarter. Could you provide more details on the performance of Princess Connect? Specifically, what are your expectations for the longevity of this game? Additionally, could you give us an update on your game pipeline and any upcoming game launches, particularly your expectations for the Mobile Version of Fall Guys? Thank you.

Rui Chen, Chairman of the Board and Chief Executive Officer

Regarding Princess Connect Re:Dive, we anticipate that this game will have a very long lifecycle and last for a significant period. It has set historical records in many ways, including over 6.5 million pre-registrations and record-high user additions. The success of this game highlights two main points: first, ACG games have become the preferred genre among the younger generation, and second, our capability to operate and maintain our ACG titles has enhanced notably over the years. We are confident about continuing this success. For a game like Princess Connect, which has such a large user base and a four-month operational history, everything has gone smoothly regarding operations and technical management. This further reaffirms that Bilibili is skilled at managing various game genres. We expect the game's lifecycle to resemble that of FGO and last for several years. Currently, we have over 30 games in our pipeline, which includes more than just ACG titles. Since last year, we've been actively broadening our content across different genres and have made noteworthy progress with some console and indie games, yielding positive results. The Fall Guys game is a prime example of our successful foray into new genres. Moving forward, we will continue to explore new genres that align with our user demographics. In terms of revenue, we believe ACG titles hold a competitive edge, and we expect Sword Art Online: Integral Factor to contribute positively to our revenue.

Operator, Operator

Our next question comes from the line of Daniel Chen from JPMorgan. Daniel, please ask your question. Your line is now open.

Daniel Chen, Analyst

Thanks management. I have a question about advertising. Our ad revenue growth actually picked up on a year-over-year basis in the second quarter. We expect this strong momentum in ad revenue to continue into the second half. What are the main drivers behind this? Is it brand advertising, or is it due to performance advertising, including fees? What are our expectations for the new ad system we launched in the third quarter for the content providers? Thank you.

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

Overall, 2020 is still full of uncertainties and lots of vitality. However, under this challenging macro environment, we still delivered a pretty good advertising growth rate at 108% year-over-year. Bilibili, as a video platform, is one of the biggest participants in the overall trend towards video content. We have observed that advertisers’ budgets have shifted from traditional platforms to video channels. As we mentioned earlier, we have invested significantly in expanding our brand awareness and raising our influence in the first half of the year. We have become the preferred platform for advertisers looking to reach the younger demographic. At the same time, we have also become the media center for creating viral marketing events, and Bilibili's brand upgrades and awareness increases have a direct impact on advertisers’ perceptions of our brand proposition. As our user base continues to grow and our PUGV ecosystem thrives, we’ve seen solid progress in expanding advertisement content categories, such as fashion, lifestyle, technology, fitness, and automotive. We’re also aiming to attract advertisers’ customers into these industry sectors. During the second quarter, we focused more on our overall marketing solutions and Bilibili’s brand propositions and influence rather than singular marketing campaigns for specific verticals. This approach is working well for us, and we plan to continue that strategy moving forward. The reason behind our strong growth in Q2 is our improvements in advertising products, our advertisers’ sectors, and our AI-powered algorithms that enhance ad efficiencies. We’re optimistic about maintaining this positive trend into the third quarter. Looking ahead to Q3 and Q4, we are confident in our ability to deliver continued growth in our advertisement business and to develop a specialized advertising solution campaign for Bilibili. One area of focus could be in e-commerce, as Bilibili’s active and engaged community has become the ideal platform for many e-commerce sites to promote shopping festivals and events. This may become an emerging sector in the latter half of the year. Our expansion into various content verticals gives us the confidence to also broaden our advertiser base in those areas. Additionally, we will keep striving for improvements in our algorithms to enhance advertising efficiency and increase advertisers' ROI. Lastly, there could be exciting new events and variations in the second half of the year. These types of special events have become popular advertising channels for reaching young audiences. The Sparkle platform is a new initiative we launched to help our content creators connect with brand advertisers. This platform offers a pricing system, order management, and settlement services for our creators. We believe this will enhance their commercial opportunities and increase their earnings. Since its launch in July, over 8,000 content creators have signed up for it. We will disclose the GMV when we hit a specific milestone. Additionally, we will keep working on improving our data capabilities to provide better decision-making support, whether pre-sale or post-sale, and to boost our content creators’ earning potential.

Operator, Operator

Your next question comes from the line of Alex Liu from China Renaissance. Alex, please ask your question. Your line is now open.

Alex Liu, Analyst

I’ll quickly translate. I'm curious about the main differences in operating expertise and the strategy between large streaming companies and our core businesses, particularly since we view live streaming as a venture that needs time to develop and will ultimately hit a significant point of user adoption. If that’s true, how far are we from reaching that critical point? Thank you.

Rui Chen, Chairman of the Board and Chief Executive Officer

The live broadcasting business has always been a part of our content ecosystem. It is not just a single commercialization avenue for us, but also an important aspect of our overall content. Live broadcasting allows our content creators to engage with their followers and enhance their commercialization potential. In recent years, there has been significant competition among various live broadcasting platforms. However, Bilibili has maintained a self-sustaining ecosystem that continually nurtures talented content creators who emerge as live broadcasting hosts and produce high-quality content. This approach sets us apart from other platforms. The content we offer in live broadcasting closely aligns with what we provide on our video platform. For instance, popular game-related videos are also favorites in our live broadcasting content. Consequently, games, talent shows, and lifestyle-related content are key areas in our live broadcasting verticals. Many of our popular live broadcasting hosts are also among our leading content creators. Two critical factors in the live broadcasting industry are the quality of the hosts and the user base. We believe we have the highest quality live broadcasting hosts and an enthusiastic audience that loves live content. In comparison to other platforms, our revenue growth tends to be more stable rather than showing sharp increases because those platforms focus on signing top content hosts for quick revenue gains. The strength of our business model lies in its stability and sustainability, leading to longer life cycles for both our content creators and live broadcasting hosts. We are confident that we will be the best platform for video content creators, as video and live broadcasting content are synonymous on our platform. We also have high confidence in becoming one of the most popular live broadcasting platforms in the future.

Operator, Operator

And 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 further questions, please contact myself, 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 on today’s press release. Have a great day.

Operator, Operator

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating. Stay safe everyone. You may now disconnect.