Bilibili Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 29, 2023

There are 6 speakers on the call.

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.

Speaker 1

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 filing with the SEC and Hong Kong Stock Exchange. The non GAAP financial measures we provide are for comparison purpose only.

Speaker 1

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 and will be available on the Bilibili IR website at ir. Billability.com. Joining us today from Bilibili Senior Management are Mr.

Speaker 1

Dorei Chen, Chairman of the Board and Chief Executive Officer Ms. Carly Li, Vice Chairwoman of the Board and Chief Operating Officer and Mr. Zeng 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.

Speaker 1

Chen.

Speaker 2

Thank you, Juliet, and thank you, everyone, I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. The record high committed growth we achieved in the Q3 is a testament to the power of our self driven content ecosystem. This is continuously drawing in more users and keeping them highly engaged. Notably, our DAUs increased by 14% year over year, surpassing the 100,000,000 milestone and landing at 103,000,000 in the 3rd quarter.

Speaker 2

MAUs also grew to a record high of 341,000,000 and the DAU to MAU ratio in this quarter improved to 30.2%. Meanwhile, Our user daily time spent also reached a historical high of 100 minutes, with total user time spent increasing by 19% year over year. We are encouraged by the strong user growth momentum and the direct In correlation with our monetization efforts, improving margins, narrowing losses and maintaining growth and has been our key objective this year. In the Q3, we leveraged our expanding traffic more efficiently, 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 5th conservative quarter of gross margin improvement.

Speaker 2

Our tight expense control measures reduced our total operating expenses by 12%, including a 19% decrease in sales and marketing expenses and 8% decrease in G and A expenses and a 6% decrease in R and 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 Q3. Notably, We achieved an important milestone of generating positive operating cash flow in the Q3, demonstrating our business operations Have entered a positive cycle and are making a step forward in our profitability goals. 2023 It 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, trimming expenses in areas yielding lower returns.

Speaker 2

In the 4th quarter, We have further streamlined our organization and expect our total headcount to be around 9,100 by the end of 2023 compared with to 11,000 at the end of 2022. Additionally, Future project plans will continue to be ROI focused. With these measures, we will become nimble as an organization to better align ourselves with the new environment, setting the stage for Bilibili's 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 continue to rise.

Speaker 2

The number of daily active content creators on our platform increased by 21% in the 3rd quarter, And the monthly new content submissions were 21,000,000, up 37% both year over year. More content creators and more wider fan base during the Q3. 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 4,700,000,000, among which, story mode video views grow by 45% year over year. As I mentioned, users are spending more time with us than ever before, with user daily time spent reaching an all time high of 100 minutes.

Speaker 2

Meanwhile, monthly interactions among our users Also increased by 18% year over year, reaching RMB17 1,000,000,000. By the end of the third quarter, We had 224,000,000 official members who have taken and passed our community exam, A 23% increase year over year and their 12 month retention rate remains 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. Invitably, our users and content creators enter new life stages and new categories emerge, Such as home decoration, relationships, baby maternity and automotive. For example, New content submissions in home decoration and appearance genre grew by nearly 90% year over year in the Q3.

Speaker 2

In parallel, content creators in this category and their earnings as well as advertising revenues generated from the same category and have all meaningfully improved. Meanwhile, we have created more directed monetization opportunities for our content creators. A total of 1,680,000 concentrators generated income on Bilibili in the 3rd quarter, up 34% from the same period last year. The adaption of video and live commerce and also brought additional channels for more creators to realize their commercial value. The number of content creators Who earned money through video and live commerce in the Q3 grew by over 160% year over year.

Speaker 2

Additionally, this summer, our 2 signature offline events, Bilibili World and Bilibili Marco 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 Q3 was RMB5.8 billion, flat year over year. Advertising revenues and VAS revenues increased by 21% 17% year over year, while offset by 33% year over year decrease in game revenues.

Speaker 2

We are encouraged by the progress in our ads and best business, where the revenue growth potential has a direct correlation with DAU growth. Meanwhile, we have taken a closing 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 community They are more willing to pay for Bilibili content and services. Looking at our VaaS business, VAS revenue for the peer rate increased by 17% year over year to RMB2.6 billion, mainly led by our live broadcasting business.

Speaker 2

The ongoing interaction of live broadcasting into our video universe and 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 21,100,000 with over 80% on annual subscription or auto renewal packages, underscoring the trust and the royalty we have built with our brand. In the Q3, we launched the highly anticipated self produced anime Link Click Season 2, Shihuang Daliren DRG, which was well received by many new and old fans. In September, we announced 68 new Chinese anime titles at our 6 Made by Bilibili Chinese anime press event.

Speaker 2

Both of these titles will be released in the next few years, ensuring a continuous stream of beloved content of our premium members. Turning to our off tiling 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 Q3, total advertising revenues grew by 21% year over year, reaching RMB1.6 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 Q3, our top 5 added verticals were games, Digital Products and Home Appliance, E Commerce, Food and Beverage and Automotive.

Speaker 2

Despite the Q3 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 4th quarter, We further strengthened our data collaboration with e commerce platform and upgrading our video and live commerce and products. The total GMV from our videos and live commerce products increased by over 2 50% year over year for the Double 11 shopping season. Turning to our game business. Total revenues were RMB RMB992,000,000 representing an increase of 11% quarter over quarter and a decrease of 33% year over year.

Speaker 2

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 Q3 this year. Our legacy games, Azulina Lion and FGO remained stable during the period. On August 30, 2023, We launched our exclusive licensed ACG title, 20 Derby. On September 8, 2023, The game was temporarily removed from the App Store for content refinement, and we are working diligently The game industry has changed dramatically in the past 2 years. At the beginning of Q4, we closely reviewed our in house game development projects.

Speaker 2

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 and D expenses. That said, As a video community for the young generation, we process 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 it creates value for our business partners. In summary, we are dedicated to reach our financial goal of gross profit improvement and the loss reduction this year.

Speaker 2

We have delivered on this goal with a 38% increase in gross profit and 51% reduction of both adjusted operating loss and adjusted net loss in the Q3, and we will continue on this path. At the same time, We strongly believe in the power of good content and community. 100,000,000 DAUs is just another beginning for us to build on. We will stay true for our mission and continue to enrich the everyday lives of the young generation in China. This concludes Mr.

Speaker 2

Chen's remarks. I will now provide a brief overview of our financial results for the Q3 of 2023. As mentioned in Mr. Chen's remarks, our financial profile Have 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 5 consecutive quarters.

Speaker 2

Total net revenues for the Q3 was RMB5.8 billion, on par with the same period last year. Our total net revenues, breaking down by revenue stream, We're approximately 45% VAS, 28% Advertising, 17% Mobile Games and 10% from our IP Deratives and Other Business. Our cost of revenues decreased by 8% year over year to RMB4.4 billion, driving our gross profit to RMB1.5 billion, up 38% year over year. Our gross profit margin reached 25%, up from 18% in the same period last We expect our gross profit margin to continue to improve in the 4th quarter. Our total operating expenses We're down 12% year over year to RMB2.6 billion in the Q3.

Speaker 2

We cut our sales and marketing expenses by 19% year over year to RMB 992,000,000 while our DAUs reached a record high. Sales and marketing expenses were 70% of total revenues compared with 21% in the same period last year. G and A expenses were RMB499 1,000,000, down 8% year over year. R and D expenses were RMB1.1 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 3rd quarter.

Speaker 2

Our adjusted net loss ratio in the Q3 was 15%, improving from 30% for the same period a year ago. Notably, we generated positive operating cash flow in the Q3. Demonstrating our business operation and entered into a positive cycle. As of September 30, 2023, we had cash and cash equivalents, Time deposits and short term investments of RMB14.5 billion or US2.0 billion dollars In the Q3, we repurchased an aggregate principal amount of $14,500,000 December 2026 notes with an aggregate cash consideration of $13,000,000 As of September 30, 2023, the aggregate outstanding principal amount of April 2026 notes, 2027 notes and the December 2026 notes was US862 million dollars We believe our cash position is sufficient to cover all of our remaining convertible bonds. Due to lower than expected game revenues, we now expect our 2023 full year revenues to be at the lower end of RMB22.5 billion to RMB23.5 billion range.

Speaker 2

Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Operator

Please immediately repeat your questions in English. The company will provide consecutive integration for management's statements during the Q and A session. Please note that the English interpretation is for convenience purposes only. In the case of any discrepancy, management's statements is in the original language will prevail. Please limit your questions to 1 at a time.

Operator

Our first question comes from the line of Changxue Qing from CICC. Please go ahead.

Speaker 3

Good evening, management. Thanks for taking my question and congrats on the 3rd quarter. My question is about user growth. The deals passed a milestone of 100,000,000 for the first time in the 3rd quarter And the user's time span reached a historical high as well. So what's your views on user growth potential and recently media The company has internally proposed that goal up doubling DAU.

Speaker 3

So management share the path and the timetable for achieving this goal

Speaker 1

I think in the big movement of visualization as A very natural process for a good video product to grow bigger and bigger by itself. That's why when we are Talking about user growth strategy internally, we've been emphasizing on improving the content quality, improving the user experience, not mainly through the user acquisition. That's why starting from Q2 last year, we have been emphasizing on the ROIs of our user acquisition strategy. As we are spending less in sales and marketing, we are actually growing more and more DAUs. And that is why we have been focusing on improving the operating efficiency, improving our product capability And pursue simultaneous commercialization as well as the user growth virtual cycle.

Speaker 1

In the Q3, our DAU has surpassed 100,000,000 milestone And we also reached a record high of NAU numbers. And this is strong evidence that we have succeeded in our user growth strategy in the past year and this is just a new beginning for us. The reason why we have been focusing on user growth is I think for all the Internet product, The user base will be one of the key competitive strengths. The larger user base we get, the more content creator as well as the commercialization will come with it. And for Internet product, user base is Also the foundation for our commercialization, as you can see from Bilibili's commercialization model, advertising and live broadcasting has Its revenue growth has direct correlation with DAU Growth.

Speaker 1

In the Q3, our ad revenue and VAS revenue grew by 21% 17% respectively year on year. And as you can see, we have already come to a strategy or form a virtuous cycle between our traffic growth and our revenue growth in advertising and the VAST, specifically like broadcasting. At the same time, the revenue that grew from these two sectors has also converted to a certain part of that also converted to our content creators' income and also will generate More content creation on our platform. So from a content ecosystem perspective, it has also been very positive to our overall content ecosystem. At this point, we still see great growth potential for our When I do the user research, I discovered that for billabilly users, There is a great word-of-mouth effect.

Speaker 1

People feel good about the product. They will naturally spread the words and introduce new users. And if you look at the past year's data, not only we have achieved very strong user growth, We have also exceeded in many metrics in terms of community growth, Video views and content creators numbers, that means that we have achieved Virtuate cycle in between the content user as well as the community. I believe as our content ecosystem continues to Prosper Bilibili should be able to attract more and more user because it's We think it's a very natural desire for all human beings to find good content Going forward, we'll still largely rely on the product improvement, content expansion to drive our user growth and pair with ROI focused sales marketing And only invest in user acquisition when the ROI makes sense. That means only to acquire user when we are making money by investing in that user acquisition strategy.

Speaker 1

That is a mid to long term user growth strategy for us. End of last year, I have raised the 3 key objectives For the company, which is in margin improvement, loss narrowing and maintain growth, We want to achieve these three targets at the same time, not by sacrificing the first two targets to achieve the last one. Thank you. Operator, next question please.

Operator

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

Speaker 4

So can management help elaborate on the key drivers for the ad business, especially with DRS in the quarter and how's the performance given the Double 11 promotional campaign? In addition, can you update us on your progress on live streaming e commerce and short video e commerce. And lastly, how should we expect the segment growth for 2024? Thanks.

Speaker 1

In the Q3, 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 Q3 of this year. And also, it has drove the gross margin gross profit improvement on a company level. So we've introduced our key strategy and the driving force of our ad business in the past two quarters comprehensively, which has been the 1 horizontal Industry Solutions as well as the middle platform power improvement. So from industry vertical perspective, Game and e commerce has been very strong.

Speaker 1

Despite Q3 being a traditional slow season, ad revenue from e commerce Still grew by 90% year on year. Additionally, we have been actively exploring other integrated solutions with other industries. For example, we've seen positive performance from automotive And healthcare industry, which also grew by 20% quarter over quarter. Going forward, We will continue to strengthen those industries' performance. We have also improved our Add efficiency on a platform level, unleashing more commercial value across different scenarios, In particularly, performance based ads grew by 40% year over year in the 3rd quarter, which has become the main growth driver of our ad business.

Speaker 1

In terms of the Double 11 shopping fast We think the overall experience overall performances has Exceeded our expectations. Ad revenue from the main e commerce platforms grew by over 80% year over year. We'll continue to adhere into the open loop strategy and continue to deepen our data collaboration with the top e commerce platforms. For example, ad revenue generated by the Alibaba Xinghua project Grew over 160% compared with the June 18th shopping festival this year. We've worked with more than 70 brands advertisers to bring new users to those to the advertisers.

Speaker 1

Over 50% of the traffic converted to Alibaba were new users to those brand owners and this ratio even reached 89% for baby and maternity The incremental ad budget brought by Alibaba's Xinghua project Has actually proven the conversion value of Bilibili's performance ads. That's why in addition to Alibaba's Jinghua project, we launched Jinghua project, a collaboration program with Jingdong recently. During the Double 11 Shopping Festival, The GMV generated from our video and live e commerce increased more than 2 50% year over year. And we have gradually built up our consumption and trading atmosphere within our content community. During the shopping season, the number of video e commerce related video increased by over 2 30% and the number of liveecommerce sessions has also grew by 100%.

Speaker 1

Bilibili's content creator, Mr. Mideng, Heath Liveecommerce GMV has reached RMB1.68 billion, which increased by over 400%. From the trading atmosphere as well as the ad revenue growth, We're confident we can continue to build on this momentum and continue to grow our e commerce related advertising revenue.

Speaker 3

As for the Q4

Speaker 1

2020 4's advertising revenue growth trajectory, We remain confident. Here are some ways we are hoping to continue to enhance and improve. First of all is That we all know Bilibili's content can deeply influence users' mindset and the brand perception. We will be very focused and continue to build our brand ad capability. The Sparkled platform will be the lever and performance based app will be our growth accelerator.

Speaker 1

And secondly is we will continue to update Our advertising model, we've been emphasizing that the integrated marketing solutions We'll be visibly strong advantage. The reason why is that we can reach user from multiple media scenario and Achieve multiple ad revenue growth. And in 2024, we'll continue to upgrade and help our ad clients to build their brand equity within Bilibili content community and help them to build a sustainable and measurable growth model. Thirdly is to improve the effectiveness and efficiency of our traditional ad scenarios and find new scenarios that suitable for different advertising strategy. Going forward, we'll continue to find a way to better collaborate between natural traffic and commercial traffic to improve our overall ad efficiency.

Speaker 1

Lastly is that we'll play close attention to the 4 key needs of our brand of our ad customers. Number 1, New product launch number 2, fear of aging number 3, transaction based ad needs Lastly is the seasonal marketing campaigns. We will build on these four key needs and to continue to Build very effective advertising solution. That's why I'm still very confident Of our advertising revenue growth in the 4th quarter and the year forward, we aim to continue to expand our

Operator

One moment for the next questions. Our next question It comes from the line of Felix Liu from UBS. Please go ahead.

Speaker 5

Let me translate myself. So we noticed that my question is on the game business. We noticed the game competitive landscape remain

Speaker 1

So firstly, I'll talk about the Appreo Derby. We really value this game. At the same time, we value user experience. So that's why we'll conduct minor content refinement and technical upgrade as soon as possible And one thing I want to add is that for user already download the game, their feedback And experience, the feedback has been very positive. As you mentioned, there has been a very competitive landscape in the I think it's more than that.

Speaker 1

We think that the overall game business or game industry has entered into a new phase where it's very hard to gain new users and it has become a more saturated market. In the past year where we still see incremental growth of gamers in the market, The secret to success is to bring a good quality gain. But in the market where it's Saturated market, only quality is not enough unless you have the Top of the top gain quality and the right timing. As come to the end of this year, we've noticed that we would find out that most of the new game launch this year have Not meet their original expectation, but the quality of those games has been good. The reason why is that the game was Set up 3 years probably 3 years ago where there was still incremental gamer growth.

Speaker 1

Their target is to build a good game, not necessarily have to be the top game or the most unique game. And 3 years later, the time has changed. From the user perspective, they would notice that for this year, there's a lot of new games, but they all look kind of the same, probably with different artistic designs. And for those Game developers, they have turned into a rat race of the minor details. Those rat rates wouldn't necessarily means new users and new income and new profit for users.

Speaker 1

They don't necessarily have to try out this new game who look the same with others because So that means Not necessarily the game market is shrinking or less active. On the contrary, we still see the gamer has been Very active. From Bilibili's data perspective, the viewers in our game content verticals, The DAU and their time spent are actually increasing a lot. They also pay close attention to new games. But the new game, which can convert real new users needs to be very unique, Very different from what the market is already offering.

Speaker 3

Given said

Speaker 1

that, we think The time has changed. The standards to invest in new games has changed now. We think there are 3 key criteria for new game to succeed. 1 is long term operation. 2nd is to be the top of a niche market or be a super top Title in the market.

Speaker 1

And lastly is focus on the ROI. And in the past, the copy cast type of project setup or the rat race type of R and D investment In house development projects because some of the projects were established based on the old standards And based on the new market and new standards, those project is very likely to be loss making when the game came online. That's why we are doing those adjustments and streamline our project. After this adjustment of our In house development game, we still kept few titles that we think will remain competitive in the current market. We will be very paying close attention to the money invested in and focus our limited resource on the very selective titles who can meet those new standards.

Speaker 1

We think the thing that we're doing with our project adjustment is correct. This movement It's not only being done by Bilibili and it's actually across the industry and it's not necessarily a bad thing. Yes. We have returned to the fundamental of game developing, which for this industry, the key competitiveness is innovation And who can really succeed in this industry is the one with the most brilliant idea, the one with

Speaker 3

Lastly,

Speaker 1

I want to emphasize that on Bilibili platform, there are large amount of young users, Young gamers has been very, very active on our platform. And digitally, we're still the most popular Game video content platform in China with a very high condensity of young generations. And also for our team, game development team, they also have the sense and understanding of Chinese gamers. What we need to do is realize those advantage and translate that into game developing. Thank you.

Speaker 1

Operator, next question please.

Operator

Certainly one moment for the next questions. Next question comes from the line of Zhang Lei from Bank of America. Please go ahead.

Speaker 4

Question is mainly regarding margin.

Speaker 3

So you noticed that we have a pretty distant improvement in gross margin. And can you give us Some outlook for Q4 and how should we look at your full year loss control targets you made previously? And any change to our breakeven target by 2024? Thank you.

Speaker 2

Okay. This is Sam. I will take this question. In Q3, our gross profit grew by 38% year over year and our GPM improved 5 consecutive quarter to 25%. We expect our gross profit margin can continue to improve sequentially in the Q4 as there is more revenue contribution from ad revenue.

Speaker 2

At the same time, we narrowed our non GAAP operating loss by 51% in Q3 and we expect we can narrow our non GAAP operating loss even more in Q4 compared with Q3. That will help us to achieve our initial financial target that to reduce our non GAAP operating loss by RMB3 1,000,000,000 in 2023. So we do keep our initial financial goal unchanged. Notably, our operating cash flow has turned positive in Q3 and indicating the business operation had entered into a positive cycle. We expect we can continue to generate positive operating cash flow in Q4.

Speaker 2

Looking to 2024, we will continue our path of gross profit improvement and loss narrowing. In one hand, we have confidence in the growth of our high margin business like ad revenue, which will continue to contribute The gross profit growth and that will be the main driver to narrow the loss. On the other hand, With some recent structured adjustments, we expect operating expenses, including R and D expenses to further decline in 2024. Together, I think we will continue to work toward the goal of even. Thank you.

Speaker 1

Yes. Thank you, Sam and management.

Operator

Thank you for the questions. And that concludes the question and answer session. Thank you once again for joining Sberly Billy's Q3 2023 Financial Results and as of today's conference call today. If you have any further questions, please contact Juliet Yang, Belipoli's Executive IR Director of Vicente Financial Communications. Contact information for IR in both China and the U.

Operator

S. Can be found on today's press release. Thank you and have a great day.

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