Bilibili Inc (BILI) 2018 Q3 法說會逐字稿

Good day, and welcome to the Bilibili 2018 Third 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 the company's future performances and are intended to qualify for the safe harbor from liability as established by the U.S. Private Securities Litigation Reform Act.

Such statements are not guarantees of future performance and are subject to certain risks and uncertainties, assumptions and other factors.

Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and in 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 statement, 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 third 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 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 Li, Vice Chairwoman of the Board and Chief Operating Officer; and Mr. Sam Fan, Chief Financial Officer.

And I'll now turn the call over to Mr. Fan, who will read the prepared remarks on behalf of Mr. Chen.

Thank you, Juliet, and thank you, everyone, for participating in today's third quarter call.

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

The third quarter represents another period of healthy growth of our business.

We continue to execute our strategy centered around content, community and commercialization.

Leveraging our high-quality content, we are attracting a number of users to our platform.

The user interaction between members help to create and solidify a community, supporting a high level of user engagement, and commercialization comes naturally through our understanding of each user's entertainment needs.

In the third quarter, our total net revenues were RMB 1.08 billion, exceeding the high end of our previous guidance and representing 48% year-over-year growth.

Meanwhile, our monthly average paying users continued to ramp, reaching 3.5 million, demonstrating over 200% growth year-over-year.

Over the quarter and in recent months, we have enhanced and expanded our content through a number of collaborations, as announced in early October.

Following Tencent's increased equity investment totalling approximately USD 318 million, we deepened our partnership by entering a strategic collaboration.

The agreement will enable us to leverage Tencent's premium content, particularly in licensing, co-producing and investment in anime as well as publish Tencent's large portfolio of high-quality mobile games.

Going forward, we are open to forging relationship with more industry leaders to improve our content offering and monetization capabilities.

Cultivating new content continue to invigorate our robust and growing community in the third quarter.

Our average monthly active users grew by 25% year-over-year, reaching 93 million.

The number of mobile monthly active users grow even faster by 33% year-over-year, reaching 80 million.

Our core user group official members who took a 100-question exam once again outgrew our MAU at 45% year-over-year to 42 million.

We continued to see deeper penetration in lower-tier cities with a very balanced gender mix, and both general and ACG content are driving user growth.

While our users are growing at a healthy pace, the amount of time spent and the level of user engagement continue to rise.

Excluding time spent on mobile games, our users spent an average of 85 minutes daily on our platform in the third quarter, up from 75 minutes in the previous quarter.

Users can enjoy hours of entertaining content covering a wide area of category on Bilibili.

During the third quarter the top 5 most content verticals were entertainment, lifestyle, games, anime and technology.

Professional User Generated Videos, or PUGVs, remains the prime means for our video content creation.

During the third quarter, 89% of our viewed videos came from the PUGVs.

Our incentive program we initiated at the beginning of the year to support our growing pool of content creators are progressing well.

New product functions such as mobile content submission enable content creators to create content anywhere and anytime.

During the third quarter, we had on average 0.6 million active content creators uploading 1.7 million videos monthly, represent 130% and 136% year-over-year growth, respectively.

Besides PUGVs, our high-quality licensed content further reinforces our leading content category such as anime and documentary.

Our premium licensed content not only provides users hours of high-quality entertainment but also help drive the remarkable growth for our premium membership program.

From partnering with leading content creators like BBC and Discovery, to co-producing titles like Chuan and the self-produced documentary [What History Book Says,] Bilibili is now one of the largest producers and broadcasters of documentaries in China.

Additional content such as our first self-produced variety show, Story Man 2, is also resonating well with many users.

Being a vibrant community for young generation enable us to learn and identify what's trending for young minds, including which IP carries high potential and which entertainment forms will be the new frontier.

With our investment in Zenith, we added considerable new content in virtual idols, including China's most popular virtual idol, Luo Tianyi, and we started to explore Virtual YouTuber, or VTuber, business.

We believe this initiative will further enhance our extensive portfolio of industry-leading license and PUGV material.

E-sports is another area that's gaining more of a spotlight with young generations.

With our foresight into industry trends, we began investing in e-sports years ago.

In addition to the previously announced Bilibili gaming e-sports club and its participation in Tencent League of Legends Pro League, or LPL, we have added a permanent spot at Blizzard's prestigious Overwatch League.

Bilibili's Hangzhou Spark team will represent the City of Hangzhou during the 2019 Overwatch Championship.

In addition, we're delighted to announce the launch of our second mobile application, Bilibili Comic, earlier this month.

We believe this initiative will further complement our core users' growing appetite for premium licensed ACG content, and thus, solidify our leading position in China's ACG industry.

Technology remains the core engine of our business.

We continue to increase our investment in research and development to drive product efficiency and improve our users' experience.

Our AI and big data-powered recommendation system as well as product design, help connect our users and content.

Over 75% of video views are now generated by our smart recommendation system, and over 40% of MAU visited our Bilibili Moments, our social function similar to Instagram, allowing users interact and engage with like-minded friends in the community.

Turning to the second pillar of our business.

Our dynamic community is more active and engaged than ever.

During the third quarter, we saw remarkable participation levels with over 440 million daily views and more than 1.1 billion monthly interactions through bullet chats, comments, likes, Bilibili Moments, which demonstrate increase of 120% and over 300% year-over-year, respectively.

The high level of interaction is one of Bilibili's most distinguished features, setting us apart from other video platforms, and generating new content and forging strong bonds among community members.

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

Revenue from our mobile games grew 24% year-over-year to RMB 744 million, led primarily by the contribution of Fate/Grand Order, or FGO.

FGO's performance continues to be stable, and we were delighted to celebrate the game's second anniversary in September, followed by a series of content updates that were introduced in October.

We are also looking forward to reviewing a brand-new chapter 2 for FGO with major content update in Q1 next year.

Additionally, we released a few new titles exclusively, including Ark Order, a thrilling ACG-themed RPG in September, and [Song of Time] in November, an exciting ACG-themed RPG with a well-known IP, which is starting to gain early momentum.

On the jointly opened -- operated game front, we published several high-quality titles in the third quarter.

They were produced by leading game developers, including Ancient Nocturne, (foreign language); Crossing Void, (foreign language); Langrisser, (foreign language); and DATE A LIVE (foreign language).

All have been well received by our users.

In the fourth quarter, we are happy to bring a number of highly anticipated games to market, including Naruto Online from Tencent and Night Falls: Survival from NetEase.

In terms of new games, we have a number of additions on deck in our pipeline.

As we have previously discussed, some of the highly rated ACG that we are looking to bring to our users, including RPGs Princess Connect!

Re:Dive and Magia Record as well as BanG Dream, A3!, all from well-known Japanese game developers such as Cygames and Aniplex.

We also have exclusive publishing rights to the [The Furious Yama], and plan to jointly publish [The Legend of Heroes: Trails in the Sky] (corrected by company after the call).

Based on these games' successful IP or previous performances in Japan, we are optimistic that our community will receive them enthusiastically.

In addition, we are actively exploring international opportunities.

Under our recent collaboration with GREE and our newly formed JV, we will not only be jointly developing mobiles games but also begin to test our international aspirations by bringing our content to Japan market.

Turning to our advertising business.

Supported by our attractive platform of immersive content and user interactions and our user base from Tier 1 and Tier 2 cities, advertising revenues increased by 179% year-over-year to RMB 137 million or USD 20 million.

We're happy to see continued growth in brand advertising as well as our performance-based advertising business.

Performance-based advertising has grown rapidly to more than 40% of our advertising revenue in the third quarter.

As we wrap up the number of clients and our -- as well as improve algorithms, we believe there's a great growth potential for this business.

Our live broadcasting and VAS revenues increased by 292% year-over-year to RMB 169 million or USD 25 million.

Beginning earlier this year, we started a number of initiatives to expand our live broadcasting content and improve product design and user experience.

We also launched a premium membership program, allowing paying member to enjoy exclusively or advanced licensed content.

These initiatives were immediately well received by our community and helped to drive continued growth for our paying users.

In the third quarter, live broadcasting paying users grew 175% compared to the same period last year.

Valid premium members continued to grow to over 2.5 million by the end of September.

This dynamic, evolving industry offers exceptional opportunity.

We are thrilled to be at the forefront of the online entertainment movement that is being driven by Z Generation that continue to populate our growing community.

This concludes Mr. Chen's comment.

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

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

Our total net revenues increased by 48% to RMB 1.1 billion or USD 157 million year-over-year.

As we wrap up our monetization efforts, we are delighted to see more diversified revenue contribution from advertising and live broadcasting and value-added services, which account for about 28% of our total revenues in the third quarter compared with 13% from the same period in 2017.

Cost of revenues increased by 60% to RMB 884 million or USD 129 million from the same period of 2017.

Revenue-sharing cost, a primary component of cost of revenues, was RMB 445 million or USD 65 million, representing 68% increase year-over-year.

Gross profit increased by 11% to RMB 195 million or USD 28 million from the same period of 2017.

Our gross profit margin declined to 18%, primarily due to increased bandwidth costs, content costs related to our user growth trend and lower revenue contribution from our higher-margin game business.

Total operating expenses increased by 120% to RMB 454 million or USD 66 million from the same period of 2017.

It is important to note that the third quarter is our peak user acquisition time.

This seasonality includes increased spending on sales and marketing and offline event expenditures.

As we continue to grow our business and further optimize our monetization structure, we expect to see better operational leverage.

With that in mind, selling and marketing was RMB 197 million or USD 29 million, representing a 163% increase year-over-year.

The increase was primarily attributed to the increased channel and marketing expenses associated with our platform and App as well as our offline events, promotional expenses for our mobile games during the summer holidays and the increased head count in selling and marketing personnel.

General and administrative expenses were RMB 111 million or USD 16 million, representing a 93% increase year-over-year.

The increase was primarily due to increased headcount in general and administrative personnel and increase of shared base compensation.

Research and development expenses were RMB 146 million or USD 21 million, representing a 96% increase year-over-year.

The increase was primarily due to increased headcount in R&D and increase in share-based compensation.

Loss from operations was [RMB 259 million] (corrected by company after the call) or USD 38 million compared with the loss of [RMB 32 million] (corrected by company after the call) in the same period of 2017.

Income tax expenses were RMB 11.4 million or USD 1.7 million compared to RMB 2.3 million the same period of 2017.

Net loss totalled RMB 246 million or USD 36 million for the third quarter of 2018 compared with RMB 15 million in the same period of 2017.

Adjusted net loss, which mainly excludes share-based compensation expenses and amortization expense related to intangible assets acquired through business acquisitions, were RMB 203 million or USD 30 million or RMB 2.9 million in the previous year period.

Basic and diluted loss per share was RMB 0.88.

Non-GAAP basic and diluted loss per share was RMB 0.72.

As of the end of September 30, 2018, we had cash and cash equivalents as well as time deposits of RMB 2.9 billion or USD 418 million compared with RMB 765 million as of December 31, 2017.

As we look ahead, our financial goals are to further grow our business and improve our operation efficiency.

With that in mind, we are currently projecting net revenue for the fourth quarter to be between RMB 1.04 billion and RMB 1.08 billion.

Thank you for your attention.

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

Operator, please go ahead.

(Operator Instructions) And our first question comes from the line of Alex Yao from JPMorgan.

(foreign language) So I have 2 questions.

One is about the partnership with Tencent.

Now that Tencent increased the shareholding in Bilibili in the quarter, what are the areas you guys will further collaborate?

Can you guys elaborate on the partnership over the next couple of quarters?

And then secondly is on advertising.

Can you guys give us an update in terms of the advertising progress?

Any metrics such as ad load or CPM will be helpful.

And then also, on the back of a slowing macro consumption and potentially ad budget cut, how do you guys think about the advertising growth outlook in the coming quarters?

(foreign language)

Alex, thanks a lot for your questions.

I'll take your question.

So in October, we are happy to announce we have further established a strategic collaboration with Tencent, specifically on the animation industry as well as jointly game operation.

(foreign language)

On the animation collaboration front, we are going to exchange and purchase of existing animation copyrights, jointly procure, produce and invest in animation projects as well as seek investment opportunities in the comic and animation industry.

(foreign language)

So Tencent and Bilibili are 2 of the major players in the animation industry, so by working with Tencent, this will intensively expand our content offering and effectively decrease our content investment in the animation copyright procurement.

(foreign language)

So on the games front, we have achieved agreement on jointly operating more Tencent games, and we think that's very positive for our pipeline that we'll be able to offer more diverse, more content to our game lovers on our platform.

(foreign language)

So both of the animation and game collaboration, in some extent, it will extend our content offering on our platform, further diversify our monetization capabilities.

(foreign language)

So as for your second question on the advertising business progress, we think we have delivered a solid quarter of advertising business in Q3, specifically on the performance-based advertising now is contributing more than 40% of our total revenue.

That demonstrates our progress and potential of this business line.

(foreign language)

So as for the brand advertising, we also delivered a solid growth.

We continued to expand the different forms of advertising based on our content ecosystem, specifically on some of the original advertising content as well as some of the brand advertising on our self-produced variety shows.

(foreign language)

The number of advertisers in third quarter were over 660 which grew over 1,500% year-on-year.

(foreign language)

And we think we still have a lot of room to grow on the advertising business front.

(foreign language)

That comes from, one, the increase of number of advertisers to improve the algorithm and to improve the advertising efficiencies.

(foreign language)

So as for the ad load of our performance-based ads in Q3 was only 5%.

So we think, on that frontier, there's still a lot of room to increase.

(foreign language)

So the ad load ratio, number of advertisers as well as the algorithm efficiencies are the 3 main factors that will affect our performance-based advertising revenue.

We think all 3 factors has a lot of room to grow, leading a large potential in our performance-based advertising business.

Okay, I'll add more color on our advertising business.

Our top 5 industry for advertising business in Q3 are for brand advertising, the food/beverage, game, communication, digital and beauty products.

And for the print ads, they are game, education, e-commerce, information and software.

Our next question comes from the line of Eddie Leung from Bank of America Merrill Lynch.

Two questions.

The first one is about your paying memberships.

Could you talk a little bit about your strategy to grow the membership program, not just in the near term but perhaps into 2019?

And then the second question is about your deferred revenue.

It's quite interesting to see your deferred revenue actually coming down in third quarter, but on the other hand the revenue guidance is actually quite stable from the second quarter.

So just wondering why there is a discrepancy.

(foreign language)

(foreign language)

So in the third quarter, we achieved a remarkable growth of our number of paying users, and that were largely driven by the increase of our premium membership.

(foreign language)

So from earlier this year, in Q1, we started to monetize through our premium membership subscription model of our business.

We see the progress for the last 3 quarters as very strong and very healthy.

(foreign language)

So for example, majority of our premium memberships are from our yearly subscribers or monthly automatically renew members.

(foreign language)

So the progress is in line with our estimation.

That is because, first of all, we have very deep user insights regarding their interest and behavior.

And our users' stickiness to -- their stickiness and loyalty to Bilibili platform is much higher than they are to other platforms.

(foreign language)

So as long as we provide the content they like, they will continue to spend on our platform.

And this trend is likely to last a very long time.

(foreign language)

So from the first 3 quarters of this year, we noticed that a majority of the user who pay for our membership is paying for the -- our copyright animation and documentary content.

(foreign language)

And for this animation and documentary content aspect, we'll continue to invest and increase our content offering.

So we are confident this increase will continue.

(foreign language)

So the monetization strategy and the content offering will be tightly linked to the nature of our users and linked to the areas that we have most advantage such as animation and documentary.

We won't be splurging too crazily to other content categories.

(foreign language)

So we are confident to say that our -- the number of premium membership will grow like the past 3 quarters, very healthily and sustainably.

(foreign language)

Okay, I will take the second question about the balance of the revenue.

As you know that the major component for our deferred revenue balance, they're from our online games.

We amortized our mobile game revenue, the growth in revenue, over the user life cycle.

For example, for FGO, we amortized FGO's growth in revenue in 6- to 7-month period.

So in Q3, we recognized -- in Q4, we recognized, the mostly, accounting wise, the growth in revenue for Q2 and Q3 for FGO.

So you will see in our guidance we indicated that there will be some quarter-over-quarter decrease for our game revenues, that is single-digit decrease.

And on the content -- that will be offset by the increase for our advertising and then live broadcasting and the value-added services.

And based on our current projections, for our growth in revenue for our game business in Q4, we estimate that the balance of our deferred revenue will resume increased trend in end of this year.

Our next question comes from the line of Alex Poon from Morgan Stanley.

(Operator Instructions)

(foreign language) I'll ask my questions in English.

I have one question.

My question is regarding the MAU target.

Could you give us a reassessment of your current MAU target for 2019 and 2020?

Given your content offering is much more diversified, you have partnerships with Tencent and other parties inside and outside of China, and user behavior data is very strong, and step-up in sales and marketing efforts, et cetera, could you give us a -- is there any upside to -- further upside to 140 million, the previous MAU target for 2020?

(foreign language)

So as for the user growth trend for the next 2 years, we'll be still consistent with what we have communicated.

(foreign language)

So by year of 2020, we're looking at an average MAU of 140 million to 150 million, and by 2019, an average of yearly MAU will be 110 million to 120 million.

(foreign language) I have a follow-up question on the 140 million to 150 million MAU in 2020.

Could you give us some breakdown regarding the demographics, composition of this MAU?

If we can break down into students and non-students and also by tier cities, it would be greatly helpful.

(foreign language)

So Mr. Chen's estimate is as the platform grows bigger and bigger, the demographic of that platform will be closer to the demographic of the country.

(foreign language)

So take our -- this year's user profile for example.

We're seeing an average age of 21 years old for our platform, and our new users' average age is 19.8 years old.

So that is already 1 year older than the previous profile, and that's closer to our -- to China's Internet demographic profile.

(foreign language)

So our new users that were registered this year, we see further penetration to the third- and fourth-tier city and that percentage has grown -- increased by 2% year-on-year.

(foreign language)

As for the content preferences, we also see an increase in the consumption of more general entertainment content, and that's also in line with what's the general public or the general young generation's interest and behavior.

(foreign language)

So as for the whole platform, because we are a very decentralized community, people with different interests can find their own specific content.

So even though we see an older demographic coming in and more general content consumption behavior as well as lower-tier penetration city, but as for the old users, the absolute perception of the content quality and content diversification for them is only getting better and better.

So we are quite confident to keep the stickiness of the community.

(foreign language)

Yes.

So that's why you see under -- in Q3, even though our users grow drastically, the number of times spent and engagement level of our community and the retention level of our community continued to stay stable and even -- grow even stronger.

So we're not just growing our user base but also increase the stickiness and -- the experience of quality growth.

So we are confident going forward even though that we're going to expand our user base to 110 million to 120 million next year, 140 million to 150 million in 2020.

We're still quite confident to say that we will be able to maintain an intact community, a very sticky and engaged community behavior.

(foreign language)

So more importantly, I would like to highlight that, in Q3, out of the 93 million MAU, 80 million were from our mobile devices.

That's also an evidence of our high-quality user component.

(foreign language)

So as everybody know, mobile devices is becoming an inseparable part of young generation's life, and the high percentage of our mobile devices is evidence that -- the quality of our users' matrix.

And our next question comes from the line of Marcus Yang from Macquarie.

(foreign language) Just 2 questions here.

First of all, can you give us a quick update on your view in terms of the regulatory issues in China?

We understand that though you announced those who streaming platforms had been banned for a while, for some time.

And so I'd like to know if you have any incremental thoughts since the same quarter earnings call on the regulation issues.

And also, we heard some game companies have been adopting like restrictions on minors.

So I'd like to know your -- any potential impact on Bilibili and also your thoughts on this.

And lastly, I think the FGOs, you mentioned that there would an update in the first quarter next year, so I just like to know on the premise of the approval license on this update.

(foreign language)

So as to your first question, I think it's a question about content security.

So this year, we have done a lot of work in terms of reinforcing our content security infrastructure.

That includes to do a full comprehensive review of our existing content library on our platform as well as increased the headcounts in the content auditor team.

I think over half of our initially increased headcounts were allocated in the content auditor team, and we have set up 2 additional locations for content-auditor center other than Shanghai.

So we are investing a lot of manpower and time to enhance our content security infrastructure.

(foreign language)

So we will -- we are quite confident about our current structure of emplacing a very safety content environment.

And we are very determined to protect the integrity of our platform.

That includes to continuously review the existing content and execute even tighter new content approval process.

(foreign language)

So as for your minor questions, actually, we have always been emplacing what the government required for all games, which is a real name registration system as well as a parent monitoring system to avoid overtime spend for minors.

(foreign language)

So we have further reinforced our parent monitoring system to help the parents and society to control and avoid minors over -- spending too much time on mobile games.

(foreign language)

So in the past, we have been fully compliant with all the government requirements, so we don't see a lot of risk at that front.

(foreign language)

So on the user profile front, our average age of our platform is 21 years old.

The minors, who define as 14 and below, is far less than 10%.

And the paying user is even less than that.

So even if there were to be more stringent minor control, that wouldn't have much of an impact on our revenue scale.

(foreign language)

(foreign language)

(foreign language)

So as for the game approval status, we don't have new updates, but we have been actively preparing and exploring different alternatives for game development.

(foreign language)

So as for the games in our pipeline, 4 of them have completed all the prerequisite process for approval, and 7 of them are nearly in completion.

So as soon as the approval process reopens we should be able to have a number of games that's ready to launch.

(foreign language)

So as for the approval suspension, we're -- because it's an industry-wide phenomenon, we are just dealing with it with a calmly heart and exploring other alternatives.

(foreign language)

So we think it's just a matter of time for the game approval to be reopened.

It won't be a permanent issue.

(foreign language)

Okay.

So Mr. Chen feels like it's only a short-term impact, not a long-term impact, that the business is still intact, that there are still a lot of demand for mobile game content.

So it's just a matter of time.

(foreign language)

Okay.

We will wait for the good news.

And our last question comes from the line of Tian Hou from T.H. Capital.

The question is related to the margin trends.

So if I look at the margin, it was slightly down.

So I wonder what's the reason.

Is that because the live broadcasting was increased and taking more portion?

So the first one's what's the reason?

And then second is what's the trend going forward?

So that's number one question.

Number two is about the 2 games.

So I wonder -- so 2 games -- with the 2 major games, what's the percentage of total revenue those 2 games are taking.

And going forward what's, the portion of the total revenue is likely to come from these 2 games?

That's the 2 questions.

Okay, I will take the question.

For the gross profit margin, we -- our current gross profit margin is 18%.

And that is because we have some incremental costs for bandwidth costs and content costs.

As well as the contribution from our game business, game revenues, they are decreasing mainly because the gross revenue for game in Q2 and Q3, they are a bit lower than Q1.

And we also talked about, we saw very nice trends for game gross revenue in Q4.

In next -- in Q1 next year, we'll see the resume of increased -- quarter increase of game revenues.

So to answer your question, the margin will be improved in Q1 next year.

And the 2 new games, currently, we just launched the game this month or last month, and we saw an early momentum.

(foreign language)

Okay.

Yes, for FGO and Azur Lane, they are -- I think they are quite stable.

And FGO's performance in Q4 is (technical difficulty) and we will (technical difficulty) the chapter of FGO in Q1 next year.

There was a nice number of (technical difficulty).

And that concludes the question-and-answer session.

I would like to turn the conference back over to the management for any additional and closing comments.

Please go ahead.

Thank you once again for joining us today.

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

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

Have a great day.

Thank you.

Bye-bye.