Bilibili Inc (BILI) 2018 Q1 法說會逐字稿

Operator: Good day and welcome to the Bilibili 2018 First 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.

Thank you, operator.

Please note today's discussion will contain forward-looking statement statements, relating to the future performance of the company and are intended to qualify for the safe harbor from liability, as established by the U.S. Private Security Litigation Reform Act. Such statements are not guaranteed 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 risk factors that could affect Bilibili's business and financial results as included in further filings of the company with the Security and exchange commission. The company does not undertake any obligation to update this forward-looking information, except as required by law.

During todays' call, management will also discuss certain non-GAAP financial measures for comparison purpose only. For our definition of non-GAAP financial measures and reconciliation of gap to non-GAAP financial results, please see the 2018 first 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, Mr. Sam Fan, Chief Financial Officer. And now, I will turn the call over to Mr. Fan who will read the prepared remarks on behalf of Mr. Chen.

Thank you, Juliet, and thank you, everyone for participating on our first earnings call as a public company. I'm pleased to deliver the opening remarks on Mr. Chen's behalf. Our successful IPO on March 28 was an exciting milestone for us. I would like to take this opportunity to thank our supporting shareholders, talented content creators, and loyal users and the employees that helped make this happen. We will continue to work tirelessly to fulfill our mission to enrich the everyday life of young generations in China.

I'm very pleased to report excellent operational and the financial results for the first quarter 2018, with total revenues of RMB868 million, this marks growth of 105% year-over-year driven by all three of our core business categories: games, advertising and live broadcasting and value-added services. Our community continues to expand with 77 million monthly active users, representing a 35% increase year-over-year. By providing high-quality content and unique user interconnectivity, user can find hours of enjoyment across a diverse set of interests, covering a wide numbers of content categories.In the first quarter, our top five viewed categories were lifestyle, games, entertainment, technology, and anime, taking over 70% of total video views.

Over the years, we have successfully developed a robust online entertainment ecosystem comprising talented content creators and a highly engaged user base. In the first quarter, 89% of our video viewers were contributed by Professional User Generated Video, PUGV. To further encourage our content creators, we initiated a cash incentive program in February of this year. Any content creator with over 1,000 fans is eligible for a cash bonus, for his or her original content submissions, which depend on various matrix including popularity as well as quality feedback from users. We believe this program will bolster our content ecosystem even further, reinforcing Bilibili as one of the largest PUGV platforms in China. The number of active content creator, and their content submission increased 96% and 154% year-over-year, respectively.

In addition to PUGV, we also provide users with licensed content in a number of verticals including: anime, documentary and variety shows. Our business model enables us not to be solely reliant on licensed content to attract users, but rather to use it as addition to enhance our content ecosystem and monetization capability. During the first quarter, we selected several new animation series to promote our premium membership program. Premium membership are entitled to watch these new series one week in advance compare to non-premium members. Our users responded with high enthusiasm-over 2 million orders were placed for this program in Q1. Through this initiative, we believe we can not only offer users better viewing experience, but also promote other value added services, including live broadcasting, as a package in the near future, once users are converted from non-paying to paying users. The early success gives us great confidence in our ongoing monetization effort.

Now, let's take a closer look at our core businesses: Revenue from our mobile games grew 97% year-over-year led primarily by the continued popularity of Fate/Grand Order or FGO. FGO remains one of China's top-grossing games, and it reached record high monthly grossing revenue in the first quarter. We expect this game to continue to produce stable revenue throughout the year. We are confident that we can replicate the success of FGO to further diversify our game revenue stream. We have a strong pipeline with several thrilling new games planned for launch in the second half of the year, including BanG Dream, a music/role playing game, and two Romance RPG targeted for female audiences: A3! and Wu Fa Chu Peng de Zhang Xin. All of these games boast strong track records in Japan, which we believe is a good indicator for how the games will perform in China. We also have several high quality mobile games in our exclusively-operated games pipeline which are produced by well-known domestic content developers. On the joint-operated game front, we look forward to bringing a member of highly anticipated ACG games including Shining Nikki, Arknights, as well as Crossing Void to our users.

Our immersive new content, user interaction and a growing community supports our advertising revenue growth of 144% year-over-year in the first quarter. Generation Z is a golden cohort targeted for all major brands. With Bilibili's status as the leading platform for this highly valued demographic, we are the "go-to" platform for advertisers targeting this group of active users. Our users spend considerable time on our platform, averaging 76 minutes per day, generating over 267 million daily video views in the first quarter, an increase of 137% year-over-year. This not only provide us with a built-in audience for advertisers, but also provides us with deep insights into our users' profiles, enabling us to curate the right feed ads. As a result, we believe we have huge room to grow across various advertising solutions. We expect continued growth in brand advertising, as well as our performance-based advertising as we expand our customer base and optimize the algorithm. We believe we are still in early stages of monetization with our advertising business and it has great potential to grow.

Notably, we experience exceptional growth on the number of paying users in the first quarter, demonstrating our heightened monetization potential. Our average monthly paying users reached 2.5 million, a 190% increase year-over-year. The majority of this growth was supported by our monetization progress with live broadcasting and the value-added services, particularly with our newly introduced hosts that fit Bilibili's users' preferences and premium membership program as mentioned earlier. We are encouraged to learn that our users responded well with our monetization initiatives and they have high willingness to pay for quality content and services. As a result, revenue from live broadcasting and VAS business increased by 151% year-over-year.

As we move through 2018, we plan to continue to enrich our content offering, improve the user experience and enhance our technologies and infrastructure that thrill our growing community of young minds. In April, we introduced a brand new Bilibili application for OTT platform, aiming to further expand our user reach. At the same time, we plan to strengthen our monetization capabilities by growing our user base and the number of paying users. In these ways that we can best support the expansion of our business while continuing to bring value to the content creators, our users, our community and all of our stakeholders.

This concludes Mr. Chen's comments. I will now provide a brief overview of our first quarter 2018 financial results.

As Mr. Chen stated, our total net revenues increased by 105% to RMB868 million or $138 million year-over-year. With robust growth from all three primary business streams, our revenue further diversified.

Our mobile games revenue increased by 97%, RMB688 million or $110 million year-over-year, representing 79% of total revenue. The increase was primarily due to the increasing popularity of mobile games such as FGO and Azur Lane.

Our Live Broadcasting and VAS revenues increased by 151% to RMB96 million or $15 million, year-over-year representing 11% of the total revenue, mainly attributable to our enhanced monetization efforts and promotion of our live broadcasting and the introduction of our premium membership program.

The advertising revenue increased by [144%] (corrected by company after the call) to RMB70 million or $11 million year-over-year representing 8% of the total revenue. The increase was driven by the robust growth of our advertising revenue from brand advertising and the launch of performance based advertising business in December 2017.

Our other revenues increased by 65% to RMB13 million or $2 million year-over-year representing 2% of the total revenue. Primarily attributable to an increase in the sales of products through our e-commerce platform.

Cost of revenue increased by 80% to RMB655 million or $104 million from the same period of 2017. Revenue-sharing cost, a primary driver of cost of revenues, was RMB335 million, or $53 million, representing a 120% increase year-over-year.

Gross profit increased by 249% to RMB213 million or $34 million, from the same period of 2017.

Total operating expenses increased by 107% to RMB287 million or $46 million, from the same period of 2017.

Sales and marketing expenses were RMB79 million, or $13 million, representing a 93% increase year-over-year. The increase was primarily attributable to the increased channel and marketing expenses associated with our app, as well as promotional expenses for our online games.

General and administrative expenses were RMB 103 million or $16 million representing a 140% increase year-over-year. The increase was primarily due to share-based compensation expenses with an IPO condition and an increase in professional service fees.

Research and development expenses were RMB106 million or $17 million representing a 92% increase year-over-year. The increase was primarily due to increase headcount in research and development.

Loss from operations was RMB74 million or $12 million compared with RMB78 million in the same period of 2017. Income tax expense was RMB3 million, or $0.5 million, compared with RMB2 million in the same period of 2017.

Net loss totaled RMB58 million or $9 million for the first quarter of this year, compared with RMB67 million in the same period of last year.

Adjusted net loss which mainly excludes share-based compensation expenses and amortization expense relate to intangible assets acquired through business acquisition, improved by 95% to RMB3 million, or $0.5 million, from RMB60 million in the prior year period.

Basic and diluted net loss per share was RMB1.73. Non-GAAP basic and diluted loss per share were RMB0.94.

As of March 2018, we had cash and cash equivalents, as well as time deposits of RMB1 billion or $168 million compared with RMB 765 million as of December 31, 2017.

Net cash provided by operating activities was RMB471 million, or $75 million, compared with RMB206 million in the same period of 2017.

As we look ahead, our financial goals are to continue improving our operational efficiency while further growing our business. With that in mind, we are currently projecting net revenues for the second quarter to be between RMB970 million and RMB1 billion.

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

Thank you. Ladies and gentlemen, if you wish to ask a question today, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key.

For the benefit of all participants on today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English.

Once again, it is star one if you wish to ask a question today. Your first question comes from the line of Daniel Chen from JPMorgan. Please ask your question.

(Spoken in Foreign Language).

Hi. I will translate myself. First, the question is regarding our user acquisition strategy. Our MAUs had grown very decently sequentially on a year-over-year basis this quarter. Could the management provide some color on your strategies to further grow your user base in the Generation Z?

Second question is regarding our gaming revenue including live broadcasting, advertisement, and also membership. This actually grew very strong -- growing strong sequentially on a year-over-year basis. So, what's management view on our revenue breakdown in the three to five years? Are we expecting that this had to account for a much bigger -- much bigger portion?

The third question is regarding to our support to the content providers. So, we have a scheme to do the revenue sharing with all the content provider. So, could we have some update on this front? And what's our strategy to motivate all the content creators to create the valuable user-generated content on our platform?

Thank you.

Thank you, Daniel.

(Spoken in Foreign Language).

Okay. I'll translate for [Mr. Li] for the first question. As you can see, our user growth is very healthy and on a stable rate and Mr. Chen concluded three reasons. One is our very healthy PUGV ecosystem that we have a very positive virtual cycle that we have more PUGV content creator, creating more content, attracting more users.

As we are focused on the depth of the categories, we're also expanding the content category. For example, in this quarter, the entertainment verticals are expanding not much faster than our traditional ACG content category as we expanded to more content vertical that will attract more content creators to create more high-quality contents. So, in that way, we don't actually have to spend a lot of money to stimulate the growth of users but rather to rely on our healthy ecosystem. That's the first point.

The second point is we also focus on a lot of the new content that attracts young minds attention. For example, in the livestreaming category, we are actively searching for new mobile games that attract a lot of users' attention. We also invested in our own E-Sports team which we called BLG. All of these contents are also driving the growth of our MAUs.

And third point, as you can see, we have an excellent long-term and short-term user retention number. At the same time, we're also actively expanding our channel acquisitions, for example, for pre-download, pre-installment or download on app stores through these three areas. That's how we achieved our sustainable user growth.

(Spoken in Foreign Language).

Okay. I'll translate for Mr. Chen.

Mr. Chen gave three reasons that's how we're going to help our content creator to better incentivize them. So, as all of you may know that 89% of our daily [BD] are contributed by our PUGV. The content creates the way that how we incentivize our content creators remains our top priority.

So, the first point is we have a very comprehensive service system to support the content creation of our content creators that would supply them with full access of our backstage data, supply them with tools to analyze how their work has been viewed by different users and what's their feedback and how many of them were from which area by a number of matrix to help them to better analyze and help them to create better content. We also have a systematic training program to help to train newcomers to lead them on the way of becoming top content creators.

And second, as the content creator incentivize program that we launched in February this year, as you may know, the top content creator can make decent income on our platform. But what we focus more is how do we bring the content creators that just started or in the middle area, to bring them to the top.

As we mentioned during the conference call that we provide a cash incentivize program for the content creator with 1000 fans and the cash bonuses is based on the popularity as well as the positive user feedback from this video, not just directly linked with what kind of income that we can receive from this video.

So, the effect of the incentivize programs were very clear in the Q1. The number of active content creator and their content submission number increased significantly year-over-year. And going forward will also supply some -- much more comprehensive incentivize programs that will support them from not just the cash basis but also provide them with marketing tools and help them to achieve better economic benefit based on various matrix. Not simply rely on the traffic income.

Okay. I will take your question. If you take a look at revenue mix in 2017 that there were 82% of revenue from games, 7% from the live broadcasting and 7% from advertising revenue.

We are happy to see that we -- when we achieved the record-high mobile game revenue in the first quarter of this year, our revenue] further diversified because we have our user base that have high willingness to pay for quality content and services and we have great potential for advertising business as we mentioned in our press release.

Now, the revenue mix does contributions for live broadcasting. They are 11% and 8% from the advertising revenues. We proceeded after three to five years, about 50% of the total revenue on the online game and this is 30% from advertising and 20% on live broadcasting and value-added services. Does that answer your question?

Thank you. That's very helpful.

Your next question today comes from the line of Alex Poon from Morgan Stanley. Please ask your question.

(Spoken in Foreign Language).

I'll translate my questions. First question is regarding MAU and content creator growth. I would like to understand the split of this MAU and content creator growth by age and also by geographical region.

And my second question is regarding the competitive landscapes on both the game side and the shared video side. PUBG ramped up very strongly in terms of DAU. Have you seen any impact from PUBG affecting your game user?

And second is for shared video, the time spent in DAU growth is very strong for these platforms. Do you see any challenge from them taking your user time spent or will create pressure for your MAU growth in the future? Thank you very much.

(Spoken in Foreign Language).

Okay. I'll translate the first question. So, as we further -- our business grow, in 2018, our daily average new user increase as actually accelerated compared to last year. And if we analyze the data in Q1, the new users, we see the portion that comes from above age 19 is increasing and we also see a clear penetration from lower tier city, more users from Tier 3 and Tier 4 city are coming in -- this is also in line with how the pop culture are penetrating from more developed area to less developed area.

And [under interest scope], we noticed that a lot of our new user have more extended interest and how this compared to our old users and we can see that they have much wider habits and interest, for example, in entertainment and documentary, those verticals are growing very nicely, thanks to our new users that we've expanded in scope and that is also a good sign which means we're extending our content offering as well as our target audience.

And lastly is from the platforms, we also see the Android users are coming -- are increasing more than iOS users. This is also in line with how this is divided in China, where there's clearly more Android user entering the market.

(Spoken in Foreign Language).

Okay. So, on the competition landscape on game wise, clearly, there's no impact from the PUBG games with our games. It's obvious that even before PUBG, there's Honor of Kings and League of Legend and our game has been performed steadily with a very stable growth rate.

The logic behind our game of business is different from other regular game companies that is our business model is to -- is to find our existing massive user base interest and habits and find the right content, right game that fits their interests and recommend it to them.

So, we will obviously continue to -- continue to bring new games and offer the games to our users' benefit, and there's very little impact from how these games evolve outside our ecosystem.

And from -- on the data point, you can see our users, our active game users, our income and their time spent are actually growing. This also supports our theory.

(Spoken in Foreign Language).

Okay. On the contrary, actually, the emerging of new pop games, actually, has a positive impact on our PUGV system as well as our live broadcasting. As you may know, that game is our number two top viewed content category on our video platform and games live broadcasting is actually number one in terms of content category on our broadcasting vertical.

So, once there's a new emerging pop game that naturally will lead more content submission and more viewers viewing the live broadcasting. It actually has a much more positive impact on our business. And we'll welcome more popular games in the market.

(Spoken in Foreign Language).

Okay. on your third question on the impact of short video application whether they have impact our business, the answer clearly is no. From the data wise, we can see that no matter if the monthly active users, their time spent, our community retention rates, or the engagement level on our community, all of this data are growing very healthy.

And the reasons why we are able to do that is we are self-sustaining ecosystem. All of this content is not produced by several editors. It's actually produced by our content creators, we believe there's no one who understand better than our users' need than the content creator themselves and they follow what's the most trendy and what's most interesting in the market and produce that content to attract our users. That's why we're always upkeep in the most interesting and popular content on our platform.

And Bilibili have nine years operating history. This type of new trendy applications or new formats of media we've seen a dozen times and none of those have affected our business progress. Hope that answers your question.

(Spoken in Foreign Language).

Once again, ladies and gentlemen, if you wish to ask a question today, it's star one on your telephone. Your next question today comes from the line of Eddie Leung from Merrill Lynch. Please ask your question.

Hi. Good morning. Thank you for taking my questions. (Spoken in Foreign Language).

So, I have two questions. The first one is a little bit about content. It seems like a lot of internet companies, whether they are short form or long form media companies or soft and large internet platforms, recently talking about investment in animations and comic content. So, I'm just wondering what's your thought in it.

And then secondly, just a small question about your game revenues. So, we know that the growth has been driven by self-operated games, so just wondering what's the trend of the jointly distributed games recently? Thank you.

(Spoken in Foreign Language).

Okay. The first -- for the first question, Mr Chen thinks the competition has always been there especially from all the major video platforms including Tencent IT , IQIYI and YouKu. There has been and will be investing in the anime or ACG area and we don't think that we'll change the competition landscape as more of an indication of how this industry has great growth potential and as it's likely to continue to grow.

(Spoken in Foreign Language).

Okay. So, the reason you asked this question is probably you've heard some of the players are extending their purchase into some of the animation license content. Well, Mr. Chen wants to emphasize the reason we are still strong in the ACG area is not because we spend a lot -- the most -- [number one] amounts of money in terms of acquiring license content. The reason is because we are this ACG evolver community, we have this community first. Then we decided to expand by acquiring more licensed content.

And we believe that ACG was the best -- the majority of ACG lover and ACG content creators are all based on Bilibili. They have interest community on our platform and this market position is not something that somebody can spend a little bit money on the content -- a licensed content can change it.

And to answer your second question. Currently, we have about 127 jointly operated games and they contribute about 11% of the total game revenue. So, the growth trend for the jointly operated game is also very well in the first quarter.

Thank you.

Your next question today comes from the line of Thomas Chung from Credit Suisse. Please ask your question.

(Spoken in Foreign Language).

Maybe I translate my questions into English. Good morning, management. I have two questions. The first question is our overseas strategies over the next couple of years. And my second question is about the number of advertisers in Q1 and what are the advertising categories? Thank you.

(Spoken in Foreign Language).

Thanks, Thomas, for the question. Let me translate. On an overseas expansion strategy, from a long-term perspective, of course, we'll definitely focus on the international market as what Bilibili is doing as focused on the fan entertainment industry that attracts young mind from all over the world as long as they have their specific interests or habits.

But in a short term, our main focus will definitely remain in Mainland China, as China being one of the largest single economy in the world and enjoys the highest economic growth rate. And we have been developing in [Mainland] for nine years and we have already established our leading position. In the short term, we'll definitely focus on the domestic market.

And the second question, will be answered by --

Yes. To answer second question, currently, we don't have much advertising customers as we've just started to monetize our VAS and the top five or top two by that customer for the brand advertising are through the brokerage the international business and comics, and for VAS the education, e-commerce, Internet services.

Thank you.

Ladies and gentlemen, that concludes the question and answer session. I would now like to turn the conference back to management for any additional or closing remarks.

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