Bilibili Inc (BILI) 2018 Q2 法說會逐字稿

Good day, and welcome to the Bilibili 2018 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.

Thank you, operator.

Please note the discussion today will contain forward-looking statements relating to future performances of the company and are intended to qualify for Safe Harbor from liability as established by the U.S. Private Securities Litigation Reform Act.

Such statements are not guarantees of future performances 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 purpose only.

For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the 2018 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 Bilibili Investor Relations website at ir.bilibili.com.

Joining us today on the call from Bilibili senior management are Mr. Rui Chen, Chairman of the Board and Chief Executive Officer; Ms. Carly Li, Vice Chairwoman of the Board and Chief Operating Officer; and 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 in today's second quarter earnings call.

I'm pleased to deliver today's opening remarks on behalf of Mr. Chen.

We are proud to announce another solid quarter with strong top line growth and the continued user expansion.

Total revenues for the second quarter reached RMB 1 billion, representing an increase of 76% year-over-year.

Each of our core business contributed to those gains, with growth across our games, advertising and live broadcasting, and the value-added services segments.

The key to our success is the active growth of our community.

Our average monthly active users grew by 30% year-over-year or 7.6 million quarter-over-quarter, reaching 85 million in the second quarter.

Mobile MAUs grew even faster, increasing 39% year-over-year to 71 million.

The strong growth momentum trend in the second quarter continued as we entered summer, where we achieved record high MAU of 98 million in July, beyond our expectations.

While we do expect to see some one-off impacts to our new users acquisition in August, based on our app download being temporarily suspended from certain app stores in China from July 26 to August 25.

Our overall user engagement and user retention rates remains high.

We are in the process of implementing better content monitoring, including a thorough self-inspection and increasing the number of our content auditor personnel.

We will continue to work closely with relevant government authorities on an ongoing basis to improve the management and operations of our business.

With our app being fully restored in all app stores on August 25, we are actively exploring ways to attract new users, and we are confident in our ability to resume our user growth momentum going forward.

Content remains the cornerstone of our business.

We continue to attract and engage users with a variety of content in a broad array of categories.

Entertainment, lifestyle, game, anime and the technology were the top 5 most popular content categories during the second quarter.

Our users on average spent 75 minutes daily on Bilibili, excluding time spent on Bilibili mobile games.

Our vast pool of talented content creators continues to be the driving force in video content creation.

During the second quarter, 89% of our viewed videos came from Professional User Generated Video or PUGV.

Beginning this year, we initiated a number of programs to provide better, more layered support for our content creators, specifically in tutoring, cash incentive and per-project basis services to new, mid and top content creators.

These initiatives are designed to further expand our cycle of highly skilled content creators while simultaneously supporting our current pool of creators, encouraging them to stretch the boundaries of their imagination.

Furthermore, to better serve mobile users, which account for 84% of our total MAU, we introduced new mobile-friendly functions, such as mobile content submission as well as full adaption for content that is in vertical form.

These efforts yielded a number of year-over-year gains in the second quarter, including a 91% increase in the number of average monthly active content creators a 131% increase in their content submissions and a 117% increase in the number of content creators with over 10,000 fans.

In addition to PUGV, we are strengthening our content offerings by bringing high-quality license content to our community, primarily in anime and documentary.

Our business model enable us to not be solely relied on licensed content to attract users but rather to use it as addition to enhance our content ecosystem and monetization capabilities.

Notably, our self-produced food documentary series Chuan was an instant success after its release in June, generating over 36 million views.

Other licensed content, such as anime and drama, are also being well received by our users and have become the primary driving force of our premium membership program.

As of the end of June, we had over 2 million subscribers to our premium membership services.

This model is working.

And we will look to bring a number of other high-quality content to our community in the coming quarters.

We are also expanding our footprint in the eSports arena, as the third most popular content vertical on our platform.

High-quality game content, particularly eSports related content is attracting more and more users.

At the end of 2017, we formed our own eSports club, called "Bilibili Gaming" or "BLG", along with our first team, which holds one of the 14 spots in Tencent's League of Legend Pro League, or LPL.

We also own the live-streaming rights to all LPL matches.

In the first half of 2018, we had accumulated over 800 million page views from all LPL-related live streaming.

We have also formed a Player's Unknown Battle Ground team and a QQ Speed team, with a goal of providing more thrilling games to our users, and reinforcing our leading position as a principal game content creator in China.

Turning to the second pillar of our business community.

Over the years, we have nurtured an encouraging and engaged community environment.

This is one of our most distinguishing attributes, setting us apart from other video platforms.

We continue to see a growing trend of engagement and stable retention rate as we improve our AI and Big-Data-powered recommendation efficiency.

Social functions such as micro blog "bilibili moments" enable users to engage and interact with their friends and their favorite content creators in a much easier and a dynamic way.

In the second quarter, our users, on average, generated over 310 million daily video views and 640 million monthly interactions through bullet chats, comments, likes, Bilibili moment posts.

The number of official members who passed our 100-question test continues to grow reaching 38 million in the second quarter, representing a 44% increase year-over-year, with an 80% 12th-month retention rate.

Our official members are even more loyal and engaged than our non-official members, leveraging our strategy initiative, engaging content and vibrant community.

We are confident in our ability to continue to attract and retain more users.

With that overview, I'd like to take a few moments to review operations within each of our core businesses.

Revenues from our mobile games grew 61% year-over-year to RMB 791 million, led primarily by the rampant popularity of Fate/Grand Order, or FGO, and Azur Lane.

FGO's growth continued to be stable, and we are excited to celebrate the game's 2nd anniversary in this September, followed by major content updates planned for November.

We have also successfully renewed exclusive license agreement for FGO with Aniplex, so that we can continue to provide more exciting contents to all of our players.

Turning to our pipeline of new games, on the exclusively licensed games front, besides some of the games we have previously discussed, such as BanG Dream, A3!

and Wu Fa Chu Peng de Zhang Xin, we are delighted to announce that we are bringing 2 more highly rated ACG games to our users: Princess Connect: Re Dive, a thrilling RPG and Magia Record, an exciting RPG based on well-known IP.

Given each of these games' success in Japan, we are confident they will have winning performances in China as well.

In addition, we will exclusively publish The Furious Yama, a high-quality domestic mobile game based on a popular anime, and jointly publish The Legend of Heroes: Trails of Star, a classic IP-based RPG.

On the jointly operated games front, we look forward to bringing a number of highly anticipated ACG games to market, including Shining Nikki, Arknights, One Piece, and Date A Live.

We are also pleased to announce we will soon be rolling out Ark Order, a domestic ACG- themed card game in coming months.

Looking at our advertising revenues, this increased by 132% to RMB 96 million or USD 15 million, year-over-year, supported by our attractive platform of immersive content, user interaction and our highly coveted Gen Z user demographic.

We expect to see continued growth in brand advertising as well as our feed ads, which is starting to show early progress as we ramp up the number of clients and ad load ratio.

In the second quarter, revenue from performance-based advertising contributed over 1/3 of our overall advertising revenue.

We believe our advertising business is still in the relatively early stages of monetization and has great growth potential.

Our live broadcasting and VAS revenues increased by 186% to RMB 119 million or USD 18 million, year-over-year, representing 12% of the total revenue.

These offerings are paramount to support continued increase in the number of paying users.

And as I mentioned before, during the second quarter, our growth is focused on our premium membership program.

Our average monthly paying users reached 3 million, a 177% increase year-over-year.

These positive trends continue to be encouraging, demonstrating our heightened monetization potential.

As the year progresses, we plan to roll out more premium content and further improve the user experience for our growing number of paying users.

Quality and community remain at our core.

Diversification and expansion will be among our chief initiatives to further grow our content and reach as many users as possible with a variety of interests.

It is in these ways that we believe we can further strengthen our monetization capabilities while continuing to grow our business and add value to our robust community of users, content creators, partners and investors.

This concludes Mr. Chen's comments.

I will now provide a brief overview of our second quarter 2018 financial results.

During the second quarter, we continued to see robust growth in all 3 of our primary business lines.

Our total net revenue increased by 76% to RMB 1 billion or USD 155 million year-over-year.

As we ramp up our monetization effort, we are delighted to see more diversified revenue contribution from advertising and live broadcasting and value-added services, which accounted for 21% of our total revenue in the second quarter of 2018 compared with 14% from the same period of last year.

Cost of revenues increased by 74% to RMB 776 million or USD 117 million from the same period of last year.

Revenue-sharing cost, a primary component of cost of revenues was RMB 417 million, or USD 63 million, representing an 84% increase year-over-year.

Gross profit increased by 82% to RMB 251 million, or USD 38 million, from the same period of last year.

Total operating expenses increased by 88% to RMB 358 million, or USD 54 million, from the same period of last year.

It is important to note that the second and third quarters are our peak user acquisition times.

This seasonality includes increased spending on selling and marketing.

With that in mind, selling and marketing expenses were RMB 128 million, or USD 19 million, representing a 146% increase year-over-year.

This increase was primarily attributable to the increased channel and marketing expenses associated with our app, promotional expense for our mobile games, and an increase in headcount in selling and marketing personnel.

G&A expenses were RMB 98 million, or USD 15 million, representing a 30% increase year-over-year.

R&D expenses were RMB 132 million, or USD 20 million, representing a 108% increase year-over-year.

This increase was primarily due to increased headcount in engineers, reflecting our continuous invest in improving our production efficiency.

Loss from operations was RMB 107 million, or USD 16 million, compared with a loss of RMB 43 （company notes it was RMB 53 million, referring to the earnings release） million in the same period of last year.

Income tax expense was flat year-over-year at RMB 2 million, or USD 400,000.

Net loss totaled RMB 70 million, or USD 11 million, for the second quarter of 2018, compared with RMB 50 million in the same period of last year.

Adjusted net loss, which mainly excludes share-based compensation expenses and amortization expense related to intangible assets acquired through business acquisition was RMB 20 million, or USD 3 million, from RMB 14 million in the prior year period.

Basic and diluted loss per share were RMB 0.26, non-GAAP basic and diluted loss per share were RMB 0.07.

As of the end of second quarter, we had cash and cash equivalents as well as time deposits of RMB 3.6 billion, or USD 548 million, compared with RMB 765 million as of December 31, 2017.

As we look --forward, our financial goals are to continue improving our monetization efficiency while further growing our business.

We are currently projecting new net revenues for the third quarter to be between RMB 1 billion and RMB 1.04 billion.

Thank you for your attention.

We would like now to open the call to our questions.

Operator, please go ahead.

(Operator Instructions) Our first question comes from the line of Mr. Alex Yao from JPMorgan.

(foreign language) So I have 2 questions.

Number one is, how to think about the user growth outlook for second half, considering you guys did a pretty good job in terms of user growth in July, but then also there is a recent suspension for app downloads in domestic and Android App Store?

And then second question is about the new game launch timetable.

You talked about a lot of new game developments in the prepared remark.

How do you think about the timetable for a new game launch, given the new game monetization approval has been suspended in China for 5 months already?

(foreign language)

Okay.

Let me just translate the first part.

Mr. Chen says that, in this view, that the second half -- the use -- in the second half, the user growth trend looks very positive, that can be reflect in our Q2 result, MAU result, as well as our July performance, where we achieved 98 million MAUs in July, and that is driven by our improved content quality and our user experience and a strong demand from our users.

(foreign language)

Okay.

So the temporary suspension of our app download will have a little impact on our August new user acquisition, but it won't affect the overall trend of our Q3 and the overall second half user trend.

(foreign language)

So in July, given that we are short for 5 days due to the temporary suspension, we still achieved 98 million MAUs.

That's a very, very good result and beyond our expectation.

(foreign language)

So our app download has been fully restored on August 25 in all app stores in China.

And we are actively exploring ways and activities to capture the last trend -- last wave of the summer vacation traffic, and we see it's working quite well.

(foreign language)

Okay.

So we forecast the August MAU will definitely be higher than the June MAU.

And the overall average monthly active user in Q3 will be over 90 million.

(foreign language)

So from our previous data, normally Q4 will be slower than Q3, but because of the temporary suspension in the summer and other new user acquisition strategy that we are undertaking, we think our Q4 MAU should be equal or even larger than Q3 MAUs.

(foreign language)

So as for the licensing permit situation, Alex mentioned, we believe that is an industry-wide temporary problem we are facing, and we believe it's just a short-term delay.

(foreign language)

Although that the temporary suspension have some -- certain impact to the whole industry regarding the second half game launch schedule, but we believe there is still a huge pent-up demand from the Chinese gamers.

We are forecasting that once the issue has -- is resolved, there will be an increasing demand for new games.

(foreign language)

Okay.

So on our -- relating to the pipeline that we discussed during the script, those pipelines are the highest quality titles that we select from -- over thousands of games, and we choose the best performance one.

And we believe those -- all those games should perform quite well in China, and it's for all of the imported and domestic games, especially for the Japanese game that we are going to license.

Their performance in Japan market will be a strong endorsement for their performance in China.

(foreign language)

Okay.

So during the waiting period, we are actively preparing tons of solutions to provide new games.

For example, we are going to bring an exclusively licensed game, Ark Order, an ACG game that's already being permitted in coming months to our users.

(foreign language)

Including what Alex just mentioned about the green channel, we're also actively preparing for that.

(foreign language)

So actually from early this year, we have been preparing all this approval process.

We have 4 games that's already complete all this pre-approval process, just waiting for the permit, that includes BanG Dream and Wu Fa Chu Peng de Zhang Xin.

(foreign language)

That concludes Mr. Chen's comment.

And let me explain about user acquisition cost and the selling marketing expense trend.

Overall, we will spend more in the second -- in the third and fourth quarter.

That's mainly because usually the peak time for us to acquire new users in summer.

And especially in Q3, we will spend more to catch up the new users acquisition momentum after our app has been resumed in all app stores.

And we will also organize some of off-line anime events, such as BiliBili World and attend a lot of very hot anime events off-line.

And we will also prepare for the second anniversary celebration of FGO in this September.

We estimate that we will spend on average about 15% of our total revenues on selling and marketing in the second half of this year and more budget will be shifted to Q3 in order to make sure our strategy can be -- can work.

And another component of our selling, marketing and staff related costs for our advertising business and that kind of costs will be increased in our advertising business.

So that will be the trend for selling and marketing in the second half of this year.

Our next question comes from the line of Marcus Yang from Macquarie.

Just a follow-up on the GAAP removal events.

Sir, can you quantify the impacts from these removal events?

The revenue guidance now suggest a 37% to 40% year-on-year growth.

And how should you look like without these events?

And maybe also in a cost and expense perspective, I understand that you may add more staff for auditing, for instance.

So that's my first question.

And I guess, my second question is with regard to your advertising business.

Last time I recall that you are planning to increase your ad loads in eCPM, et cetera.

And has that started to contribute from second quarter?

Or any updates on that progress will be appreciated.

Marcus, do you mind translating that into Chinese?

(foreign language)

(foreign language)

So overall, there will be certain impact for the new user acquisitions in August related to the temporary app removal, but we think the overall revenue growth trend as well as user growth trend will not be impacted by this temporary removal.

(foreign language)

Okay.

During the period of suspension, we have conducted through all rectification process.

The doubling auditing team plan was not just simply to dealing with this suspension but it's actually related to our actual businesses involvement, our new content submission is increasing very rapidly and we were going to increase the headcount of our auditing team, and we are just expediting this process.

Yes, just to add 1, 2 points.

One, we will double our current auditing team member -- the number of our current auditing staffs.

So basically we estimate that the impact will be around RMB 5 million in the second half of this year.

And as we mentioned before, we are spending more on selling and marketing in August and September, in order to catch up the user acquisition momentum.

And I think, Mr. Chen can -- will add more color on the advertising business.

(foreign language)

Our advertising revenue growth momentum is very positive as it's been showed on our Q2 earnings report.

The performance-based advertising, which was just launched early this year, is already contributing over 1/3 of our advertising revenue.

(foreign language)

So continuing with the performance-based advertising, we have launched 2 large scale of new agency recruiting conference in end of March and beginning of June, and that help us to recruit and increase the number of advertising agencies who are representing Bilibili.

Actually, in Q2, the number of advertising agency grew over 100% quarter-over-quarter.

(foreign language)

This growth is not just really -- not limited to the number of growth but we are also expanding our coverage in multiple industries, and that is also helping our conversion and revenue growth.

(foreign language)

We are also optimizing our algorithm and our strategy to improve the click-through rate.

(foreign language)

So as you may know, to increase the performance-based advertising revenue, there are several metrics.

The growth of number of advertising agency and the quality of advertising agency as well as the algorithm and our recommendation policy as well as app load.

What we are doing in improving in Q2 was mainly focused on increasing the number of advertising agency and the quality of advertising agency and improve our algorithm and Big Data capabilities, not so much on increasing of app load.

(foreign language)

On the brand advertising front, we're also expanding our customer base and improving our brand influence in the industry, where we think we have improved our overall strategic planning marketing as well as integrated marketing capabilities for brand advertisers in the second quarter.

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.

Thank you, operator.

And thank you, once again for joining us today.

If you have further questions, please contact myself, Juliet Yang, Bilibili's Senior Director, or TPG Investor Relations.

Our contact information for IR in both China and U.S. can be found on today's press release.

Have a great day.