Earnings Call Transcript - BILI Q2 2023

Operator, Operator

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

Juliet Yang, Executive Director of Investor Relations

Thank you, operator. During this call, we'll discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially from those mentioned in today's news release and in this discussion, due to a number of risks and uncertainties, including those mentioned in our most recent filings with the SEC and the Hong Kong Stock Exchange. The non-GAAP financial measures we provide are for comparison purposes only. Definitions 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 all for joining our second quarter conference call for 2023 to discuss our financial and operational results. I'm happy to present today's opening remarks on behalf of Mr. Chen. Our focus has been on prioritizing profitability and daily active users (DAU) growth, and we’ve made significant progress towards these objectives. In the second quarter, we improved our gross profit and reduced our losses while achieving healthy DAU growth and strong community metrics. I will provide more details on both areas. First, regarding our path to profitability. In the second quarter, we enhanced our commercialization efficiency, allowing us to transform our growing traffic into quality revenue growth. We saw encouraging trends in our advertising and live broadcasting businesses, with ad revenues climbing 36% and live broadcasting revenues growing 32% year-over-year. Moreover, our gross profit jumped 66% year-over-year, increasing our gross profit margin to 23%, marking the fourth consecutive quarter of improvement. We also tightened our expense controls, with total operating expenses falling by 14%, including a 22% reduction in sales and marketing expenses, 14% in G&A expenses, and a 7% decrease in R&D expenses, all compared to the previous year. These margin improvements and effective cost management helped lower our non-GAAP net loss by 51% year-over-year. Next, on community growth. Our DAUs rose 15% year-over-year to 96.5 million in the second quarter, improving our DAU to monthly active user (MAU) ratio to 29.8%. Additionally, users spent an average of 94 minutes daily on our platform, up 22% year-on-year. We are happy to see this strong DAU growth continuing in the third quarter. As we enter the second half of this year, our key objectives will focus on three core areas: enhancing our traffic commercialization efficiency by increasing ad and live broadcasting revenues, introducing more high-quality games to our users—including the much-awaited Pretty Derby— and maintaining strict cost control to further reduce losses. Importantly, we are dedicated to ongoing DAU growth and cultivating a vibrant video community for younger generations in China. Now, I’d like to briefly update on our three core pillars: content, community, and commercialization. We recognize that content creators are crucial to our ecosystem. Supporting their ability to gain large followings and earn more is one of our top priorities. We consistently optimize our algorithms and products to promote high-quality content and ensure creators receive recognition. In the second quarter, the number of daily active content creators and monthly content submissions on our platform grew by 19% and 43% year-over-year, respectively. In the second half of the year, we will transition our video watching metric from views to time spent, which will help users discover more high-quality content. We are also beta testing an AI-powered search feature to make relevant videos easier to find. Creator monetization also rose in the second quarter, with over 1.58 million creators earning through various Bilibili channels—a 40% increase year-over-year. Besides our cash incentive program, more creators are generating income through advertising and live broadcasting channels. Our video commerce ads have provided new earning opportunities, with the number of creators benefiting from video commerce growing over 220% year-over-year. Engaging content and multi-scenario products, like Story Mode, continue to attract users. In the second quarter, our total daily video views rose 31% year-over-year to 4.1 billion, while Story Mode's views surged by 76% year-over-year, becoming a key consumption scenario for our users. Looking at our community, user engagement remains high. Users spent an average of 94 minutes daily on our platform, the highest for any second quarter in our history. Monthly interactions climbed to nearly 15 billion in the second quarter, up 19% year-over-year. Our official member base grew by 26% year-over-year to 214 million, maintaining an impressive 12-month retention rate of around 80%. Our offline events also foster community engagement. In July, we organized two successful events, Bilibili World and Bilibili Macro Link in Shanghai, with over 200,000 tickets sold out almost instantly—a testament to our appeal among younger generations and users' willingness to invest in our unique experiences. Regarding our commercialization and financial achievements, total revenues for the second quarter grew by 8% year-over-year to RMB 5.3 billion. Specifically, our advertising and live broadcasting revenues increased by 36% and 32% year-over-year, respectively. We continued to enhance our gross profit and margin, with gross profit in the second quarter expanding by 66% year-over-year, thus boosting our gross profit margin from 15% to 23% compared to the prior year. In detail, revenues from our value-added services rose by 9% year-over-year to RMB 2.3 billion in the second quarter, driven largely by the live broadcasting business, which saw a 32% year-over-year increase. This integration of live broadcasting with our video operations has opened up multiple opportunities for expanding and diversifying our live broadcasting content. As of the end of June, we had 20.5 million premium members, with over 80% subscribing to annual or auto-renew packages, demonstrating our strong user relationships. In Q3, we've launched several highly anticipated Chinese anime titles, such as Fog Hill of Five Elements and our self-produced title Link Click Season 2, providing more exclusive high-quality content for our premium members. For our advertising sector, we believe we've found effective ways to convert our high-quality traffic into advertising revenue. In the second quarter, advertising revenues surged by 36% year-over-year to RMB 1.6 billion, predominantly driven by more than 60% year-over-year growth in performance-based ad revenues. Our offerings aimed at brands and Sparkle also experienced double-digit growth year-over-year. The main advertising sectors were games, e-commerce, digital products and home appliances, skincare and cosmetics, and food and beverage. Our progress in integrated industry ad solutions has attracted more advertising budget allocation from the gaming and e-commerce industries. Specifically, by introducing video commerce products, e-commerce ad revenues increased by 144% year-over-year in the second quarter. We will continue to enhance our commercial database, refine our algorithms, and optimize our ad product offerings. We are confident in improving ad revenues per DAU and achieving strong growth in the second half of 2023. Concerning our games business, we recorded revenues of RMB 891 million for the second quarter, marking a 15% decrease from the same period last year, mainly due to the absence of new game launches and some titles’ revenue declines. Our leading games, Azur Lane and FGO, remained stable, with Azur Lane reaching a peak in paying users and revenues during its six-year anniversary. In July, we released our first self-developed game in the female romance genre, Alkaidland Records, which was well-received and quickly topped the iOS free download chart. We are focused on developing more user-friendly games and plan to release seven new titles in domestic and overseas markets in the second half of the year, including the highly anticipated Pretty Derby, set to launch on August 30 and currently available for pre-registration, with over 2 million players already signed up as of today. However, we experienced delays in the launch of Pretty Derby and other self-developed titles, which prolonged from our initial plans. Due to reduced revenue contributions from games and non-core businesses like IP derivatives, we now project full-year 2023 revenue between RMB 22.5 billion and RMB 23.5 billion. As mentioned earlier, our main financial goal this year is to improve our gross profit and reduce losses. We achieved a 66% increase in gross profit and a 51% reduction in adjusted net loss in the second quarter. Looking ahead, we are committed to further boosting our gross profit, managing our expenses effectively, and significantly decreasing losses in the second half of this year while aiming for breakeven by 2024. As we work towards our financial targets, we will continue to promote healthy platform growth and enrich the lives of young people in China. This concludes Mr. Chen's remarks.

Sam Fan, CFO

I will now provide a brief overview of our financial results for the second quarter of 2023. As mentioned in Mr. Chen's remarks, our financials continue to improve. We are improving our margins and showing clear results in our bottom line with narrowed losses. Total net revenues for the second quarter were RMB5.3 billion, up 8% compared with the same period last year. Our total net revenues breakdown by revenue stream was approximately 43% VAS; 30% advertising; 17% mobile games; and 10% from our IP derivatives and other businesses. Our cost of revenues decreased by 2% year-over-year to RMB4.1 billion, driving our gross profit to RMB1.2 billion, up 66% year-over-year. Our gross margin was 23%, up from 15% in the same period last year. We expect gross margin to continue to improve throughout the back half of the year. Our total operating expenses were down 14% year-over-year to RMB2.5 billion. Tight control of our expenses is ongoing while we improve our monetization at the same time. We cut sales and marketing expenses by 22% year-over-year to RMB918 million, while our DAUs grew by 15%. As a percent of total revenues, sales and marketing was 17%, compared with 24% in the same period last year. G&A expenses were RMB539.7 million, down 14% year-over-year. R&D expenses were RMB1 billion, down 7% year-over-year. Our net loss and adjusted net loss were RMB1.5 billion and RMB964.1 million, respectively, narrowing by 23% and 51%, year-over-year, respectively. Our adjusted net loss ratio in the second quarter was 18%, improving from 40% for the same period a year ago. Turning to our capital allocation and liabilities management. In June 2023, we completed the repurchase right offer for our 2027 notes with a total principal amount of US$746 million. As of the end of the second quarter, our outstanding convertible bonds totaled a principal amount of US$876 million. As of June 30, 2023, we had cash and cash equivalents, time deposits and short-term investments of RMB14.3 billion, or US$2 billion. We believe this amount is sufficient to cover all of our remaining convertible bonds and fund our future operations. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Operator, Operator

Ladies and gentlemen, we will now start the question-and-answer session. We are now taking the first question, which is from Xueqing Zhang from CICC. Please go ahead, your line is open.

Xueqing Zhang, Analyst

Good evening, management. Thank you for addressing my question, and congratulations on moving towards profitability. I would like to ask about user engagement. DAU has increased further in the second quarter. What is the outlook for DAU moving forward? Additionally, could management provide more insights on user engagement during the recent summer holiday? Thank you.

Rui Chen, CEO

Since last year, I have been highlighting that increasing our earning power and achieving healthy and sustainable daily active user growth are our company's top two priorities, and we have been implementing this strategy effectively. In the second quarter, despite a 22% year-on-year decrease in sales and marketing expenses, we have grown our daily active users by 15%, reaching 96.5 million. Additionally, daily user time spent reached 94 minutes, a record high for this period in our operational history. Our overall community engagement also increased by 22% year-over-year. These metrics indicate strong and healthy growth for the community. We emphasize the importance of healthy DAU growth as it lays the foundation for Bilibili to achieve sustainable profitability. We believe we have identified an effective method to convert our high-quality traffic into increased revenue through advertising and live broadcasting. With this approach, we anticipate a virtuous cycle of DAU and revenue growth. In the second quarter, our advertising and live broadcasting revenues grew by 36% and 32% year-over-year, respectively, significantly outpacing the industry average. Looking ahead to the summer, we have experienced strong growth in DAU and daily user time spent. We expect that in the third quarter, our DAU will exceed the milestone of 100 million, and our average daily time spent will reach a new historical high. With careful management of sales and marketing expenses, we are confident that we can continue attracting users with high-quality content and retaining them with our engaging community, achieving sustainable and healthy DAU growth. We also believe this high traffic can be effectively converted into our long-term revenue growth.

Juliet Yang, Executive Director of Investor Relations

Next question, please. Thank you.

Operator, Operator

Thank you for the question. We are now taking the next question. Please standby. And the next question is from Lei Zhang from Bank of America Securities. Please go ahead. Your line is open.

Lei Zhang, Analyst

Thank you to management for taking my question, and congratulations on the strong advertising growth. My question is also about the ad business. Can you share the key factor driving the ad business after the strong performance in the second quarter? Additionally, can you provide updates on the June 18 promotion growth on our platform? What should we expect for ad growth in the second half on Bilibili? Also, how should we view the development of e-commerce streaming in relation to our ad business? Thank you.

Carly Lee, COO

In the second quarter, our ad revenue increased by 36% compared to last year. Additionally, in the first half of this year, our ad gross rate surpassed the industry average. When looking at ad revenue as a percentage of total revenue, it rose from 25% during the same period last year to 30% in the second quarter, significantly contributing to our gross profit growth. Our one horizontal and one vertical strategy mentioned last quarter is beginning to show results, driving our advertising revenue growth. The horizontal aspect refers to our technology middle platform and data capabilities, which include optimizing our recommendation model, enhancing advertising inventory and matching efficiency, and applying AIGC to boost overall ad efficiency. The vertical aspect pertains to our six customized industry application models, which include gaming, e-commerce, FMCG, automotive, and internet services. Notably, e-commerce and gaming are starting to yield very positive outcomes. Ad revenue from the e-commerce sector grew by over 140% year-on-year in the second quarter, while the gaming industry saw an increase of over 40% year-over-year. Another factor contributing to our growth is the integration of content and commercialization that we have maintained since last year, allowing us to expand ad inventory across various community scenes without compromising user experience. In the first half of this year, this strategy created considerable growth momentum and accelerated revenue growth. Additionally, we established a trading ecosystem center to build video e-commerce capabilities in the second quarter by integrating transactional scenarios into our advertising products, which will further support revenue growth. We anticipate that video e-commerce ads will account for about 10% to 15% of our ad revenue this year. In the coming months, we also plan to enhance the membership shopping experience on our main page to create more commercial opportunities. During the June 18 promotional period, our collaboration with the e-commerce platform resulted in a 200% year-over-year increase in ad revenue from the e-commerce industry. Looking ahead to the Double 11 festival, we expect to see a 15% to 16% year-over-year increase in e-commerce ad revenue. For instance, our partnership with Alibaba's Spark program exceeded our expectations. Notably, 70% of users who accessed Taobao through Bilibili were new customers, with certain industries seeing that figure rise to 90%. This indicates our effective ability to convert users for advertisers. Furthermore, Bilibili users displayed a high conversion value 15 days post-viewing related videos. During the June 18 period, ad revenue from Alibaba surged by 300% year-over-year. While many platforms are developing their own e-commerce solutions, Bilibili has adopted an open approach, collaborating with e-commerce players and brand owners to mutually boost sales on our platform. Our foremost priority is to cultivate user consumption behaviors and mindshare on Bilibili. We believe the young generation is eager to consume, and fostering mindshare is crucial for unlocking their purchasing power on our platform. In the first half of this year, nearly 30 million users clicked on shopping links in Bilibili's video commentary section, resulting in transaction-related behaviors. As we harness user consumption demand, the number of videos featuring product links increased eightfold in the first half of this year, and live e-commerce broadcasts rose sevenfold. Moreover, we will continue to support our content creators in achieving sustainable operations through our video e-commerce initiatives. An increasing number of content creators, including many well-known figures, are exploring Bilibili video e-commerce. We are pleased to see that this model is effective and dispels the notion that Bilibili users lack purchasing power. In fact, our data shows that many female users, who comprise 45% of our user base, exhibit strong consumption potential and buying power. We plan to explore additional categories beyond our traditional strong verticals, including food, beauty, digital products, and home appliances. For instance, in mid-April, Xiaomi launched a live e-commerce show for its new cellphone, where Bilibili ranked first in GMV among all content platforms, demonstrating our strong word-of-mouth influence and our users' purchasing power. The Bilibili ad model has evolved from simple brand perception to an integrated advertising solution, encompassing brand building, engagement, and sales conversion. In the first half of this year, we upgraded our industry ad solutions for gaming and e-commerce, and our transactional strategy is yielding positive results. For the second half, we plan to further enhance our leading ad industries, including FMCG, digital products, and home appliances. We are confident that with healthy and sustainable user growth, we can achieve 25% to 30% year-on-year ad revenue growth for the full year.

Juliet Yang, Executive Director of Investor Relations

Thank you. That concludes this question's answer. Operator, next question, please.

Operator, Operator

We are now taking the next question. Please standby. The next question is from Kenneth Fong from Credit Suisse. Please go ahead. Your line is open.

Kenneth Fong, Analyst

Thank you, management, for taking my question. I noticed that we lowered the full year revenue guidance. Can you share the main reasons behind this? Are we still on track to reduce losses this year? Thank you.

Rui Chen, CEO

The reason for the guidance update is primarily due to two factors: first, the launch plan for our games has been delayed; and second, certain non-core businesses, including our comic and IP derivative segments, are currently undergoing strategic adjustments, leading to lower-than-expected revenue. We consider this guidance update to reflect a temporary phase rather than a fundamental shift, as our core business remains strong. For instance, the delay in game launches means we will recognize revenue slightly later, with Pretty Derby set to launch on August 30, which is confirmed and certain. Our outlook and confidence in the game's quality and revenue remain unchanged. As seen in the second quarter, our core business segments, specifically Bilibili live broadcasting and advertising, have shown solid growth. We anticipate that both advertising and live broadcasting will continue to grow healthily in the second half of this year and into 2024. At the beginning of this year, we set financial targets aimed at increasing gross profit and reducing net losses. We have established key performance indicators for each department to ensure absolute dollar growth in gross profit. Strategically, we have diminished the contribution of low-margin or loss-making businesses, even though some revenue growth rates have been affected. Nevertheless, the absolute dollar amount of our gross profit continues to show strong growth. In the second quarter, our gross profit rose by 66% year-over-year, our gross margin has expanded for four consecutive quarters, and we have narrowed our adjusted net loss by 51% year-over-year. I am confident that we will meet our loss-cutting targets for 2023 and our breakeven goal by 2024.

Sam Fan, CFO

Yes, this is Sam. I just want to add that on the loss reduction side, even though the revenue growth rate, as Mr. Chen has already mentioned, will be lower than expected, we feel confident about achieving the loss-cutting target we set at the beginning of this year, which is to cut our adjusted operation loss by RMB3 billion through gross profit increases and expense control. Notably, in the second quarter, our operating cash flow was close to breakeven. We believe there's a good chance that we can achieve operating cash flow positive in the fourth quarter of this year. Additionally, we are confident we can continue to improve our gross profit margin in the second half of this year and achieve our breakeven target by 2024. Lastly, the updated full year guidance reflects our current projection of various potential outcomes. We will try our best to ensure a smooth product launch as well as achieve our goal of increasing gross profit and narrowing losses. Thank you for your question.

Juliet Yang, Executive Director of Investor Relations

Next question, please, Operator.

Operator, Operator

We are now taking the next question. Please standby. The next question is from Yiwen Zhang from China Renaissance. Please go ahead. Your line is open.

Yiwen Zhang, Analyst

Thank you for taking my question. I would like to ask about the game business. Can you provide details on the pipeline, particularly regarding Pretty Derby? What are your expectations? Additionally, can you share insights on your self-development game strategy and its direction? Thank you.

Rui Chen, CEO

In the second half of this year, we have seven titles ready to be launched both domestically and internationally. Among these, five have been approved for the domestic market, while two will be launched internationally. The highly anticipated game Pretty Derby is set to launch on August 30. In just two weeks of pre-registration, over 2 million users have signed up for this game, establishing a new record for pre-registrations in our history. Due to its large fan base, we have invested significant effort in localization to ensure that gamers receive the authentic Pretty Derby experience, which has contributed to its several-month delay. We believe Bilibili's game launch team is the top ACG game launch team in China, with the experience needed to guarantee a smooth and successful launch for Pretty Derby. We are confident that it will be a successful title, along with positive user feedback and reputation. In terms of our self-development pipeline, we plan to launch two ACG card games in the latter half of this year, including one game named 'indiscernible,' which was launched today, and another set for release in October. Given the intense competition in the gaming industry this year, we will focus on content and genres where Bilibili excels. I intend to dedicate a significant amount of time to ensure the success of our self-developed games, as we are newly entering this area. We will take a practical, step-by-step approach to guarantee that each game we launch meets high-quality standards and achieves success. Additionally, it's vital for us to think about the long-term operation of games. I believe that all games must have a long-term operating cycle to be profitable. This is a requirement for our self-developed games; if a title isn't designed for long-term operation, we will not pursue it. The same applies to licensed games. For those already online, effective management and long-term operation will be key performance indicators for our team. Bilibili has a strong track record in maintaining long lifecycle operations. For instance, our Azur Lane recently celebrated its six-year anniversary, while 'indiscernible' just celebrated its seventh anniversary last week, with user metrics remaining very healthy for both titles. During the sixth anniversary of FGO, its daily active users even exceeded the numbers from its own six-year anniversary. We will remain committed to ensuring that all of our games have a sustainable long-term operation cycle.

Juliet Yang, Executive Director of Investor Relations

Operator, next question, please. Thank you.

Operator, Operator

We are now taking the next question. Please standby. The next question is from Lincoln Kong from Goldman Sachs. Please go ahead. Your line is open.

Lincoln Kong, Analyst

My question is about AIGC's application to Bilibili. From the past Investor Day, we observed some developments or strategies showcasing how AIGC can enhance production efficiency, marketing tools, and AI-integrated search. Could management provide more details on how AIGC could benefit Bilibili?

Rui Chen, CEO

We believe this is a breakthrough technology that AIGC can bring to the industry. We compare it to the mobile internet that emerged a decade ago. This will not only benefit Bilibili but everyone involved. Our core business focuses on video and ACG, and it's evident that AIGC can significantly enhance efficiency on both ends, including content production and content recommendation. It will also help us manage our community better by understanding the text and content relevant to our users. We see AIGC as having numerous applications that will improve the overall user experience. In terms of application scenarios, we've already engaged in extensive research and development, identifying many opportunities to utilize this technology. For example, the introductory remarks made by Sam were powered by our proprietary AI text-to-speech tool. We are also starting to explore and develop similar products for various applications. Furthermore, during this year's Bilibili Macro Link, our live virtual hosts' voices were generated using our TTS AI tool. Another application involves video creation related to knowledge; many content creators typically write scripts and record their voices. Our AI tool can significantly boost production efficiency in these cases. Regarding large language models, although we’re not aggressively marketing them yet, we have begun incorporating them into our daily operations. On the content auditing side, we previously needed considerable human resources to manage content, but with large language models, we can interpret voice, text, meaning, and implied meanings, greatly enhancing the efficiency of our auditing process. Another area for enhancement is search functionality; with our extensive content library, we are utilizing the LLM to improve search efficiency. We are currently beta testing a new search function that allows users to pose questions directly in our search box, with our large language model able to summarize and answer those questions. For instance, after the recent Genshin Impact update, users can simply ask which card to draw or which character to improve, and the model will provide concise, relevant answers instead of them having to watch multiple videos for insights. We are also testing an AI Assistant feature that will engage users while they watch videos, helping them summarize and extract useful information. For example, in a MacBook review, users can inquire about the differences between the M2 Pro and M2 chips, and the AI Assistant can provide precise information. All these developments are aimed at enhancing the user experience on Bilibili. Internally, we hold AIGC technology in high regard, viewing it as a unique opportunity akin to the introduction of mobile internet, which significantly accelerated Bilibili's mobile user growth. We are confident that as AIGC technology evolves, we can harness it to greatly improve user experience and enhance our commercialization processes.

Juliet Yang, Executive Director of Investor Relations

That concludes the questions. Operator, we can close the call today.

Operator, Operator

And that concludes the question-and-answer session. Thank you once again for joining Bilibili's second 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 Piacente Financial Communication. Contact information for IR in both China and the USA can be found on today's press release. Have a great day.