Bilibili Inc (BILI) 2022 Q3 法說會逐字稿

Good day, and welcome to the Bilibili Third Quarter 2022 Financial Results and Business Update Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Juliet Yang, Executive Director of Investor Relations. Please go ahead.

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. Definition of these measures and our reconciliation table are available in the news release we issued earlier today.

As a reminder, this conference is being recorded. In addition, an investor presentation and a webcast replay of this conference call will be available on the Bilibili IR website at ir.bilibili.com.

Joining us today from Bilibili senior management are Mr. Rui Chen, Chairman of the Board and Chief Executive Officer; Ms. Carly Li, Vice Chairwoman of the Board and Chief Operating Officer; and Mr. Sam Fan, Chief Financial Officer.

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

Thank you, Juliet, and thank you, everyone, for participating in our third quarter 2022 results conference call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen.

Our community, which is the foundation of our business and key to our long-term success, continue to expand. In the third quarter, DAUs reached more than 90 million and MAUs nearly 333 million, both up 25% year-over-year. Average daily time spent per user was 96 minutes in the third quarter, up 8 minutes from the same period last year. With that, the total time spent on Bilibili grew by 37% year-over-year.

Having said that, we still face macro headwinds and uncertainties that loom over the industry. To cope with the challenging environment, we have reprioritized our goals and promoted to focus on 2 key targets that will help us turn the corner.

First, our users and our MAUs have reached a sizable base of nearly 333 million. We think it is time to shift our primary focus to DAU growth. DAUs not only represent the quality and the sustainability of our community, but also directly linked to our influential power as a platform as well as various commercial products, particularly in terms of revenue generation for our advertising and VAS business. With our improving product offerings and refined algorithms, we can continue to grow our DAU base and improve our DAU-to-MAU ratio with reduced sales and marketing spend.

Second, we are committed to improving our financials by expanding our gross margin and narrowing our losses. After a challenging first half of the year, revenues in the third quarter grew to RMB 5.8 billion, up 18% quarter-over-quarter and 11% year-over-year.

In the third quarter, we continue to take various actions to tighten our spending. Gross margin improved to 18%, up 3 percentage points sequentially. Sales and marketing expenses as a percentage of total revenues were 21%, down 3 percentage points sequentially. Our non-GAAP net loss ratio also narrowed by 10 percentage points compared with the prior quarter.

Looking ahead, we will implement a number of additional cost control measures and further rationalize our marketing expenses and headcount planning. Specifically, we are still minimizing our investment in R&D and cutting down our projects with lower chance of success and being extra mindful when exploring new opportunities.

At the same time, we are centralizing our resources in areas related to improving commercialization efficiency and user experience. These adjustments will be completed by the end of this year. Accordingly, we expect our sales, marketing and R&D expenses to peak this year and start to decline in 2023 with net loss narrowing further accordingly.

With that, I'd like to provide a brief update on our core pillars of content, community and commercialization. Starting with content. Over the years, as the young generations on Bilibili grow up and enter into new stages of life, their interests evolved, driving creative passion as well as expansion of our content categories.

So on top of our traditional strong content verticals, we have seen emerging categories such as automobile, home decoration and internal design and baby and maternity. In the third quarter, 3.8 million monthly active content creators on Bilibili readily accommodated these varied needs, creating near 15 million new videos on a monthly basis, up 14% and 54% year-over-year, respectively.

The expanding content library drives the overall traffic growth on our platform. Total video views grew by 64% year-over-year, driven by both PUGV and Story Mode content, which grew by 34% and over [470%] year-over-year, respectively. Particularly, with improving content distribution capabilities of Story Mode, content creators can build their fan base more easily, sharing their content with other [contract spreads] on Bilibili.

The various monetization process we have cultivated for our content creators continued to offer more creators, more opportunities to make money while doing things they love. In the third quarter, over 1.2 million content creators earned their income through multiple channels on Bilibili, up 74% year-over-year.

Looking at our community. We consistently deepen our user engagement in our community with our featured and diverse content. As I mentioned earlier, the average daily user time spend reached a record high of 96 minutes, up 8 minutes from the same period last year. Our monthly interactions also increased 41% year-over-year to 14.4 billion. Furthermore, the number of official members on our site was up by 37% year-over-year to 183 million, maintaining a stable 12-month retention rate above 80%.

Now let's look at our commercialization and the prospects for near- and long-term monetization. First, our VAS business. Our VAS revenues was RMB 2.2 billion, up 16% year-over-year in the third quarter. By further integrating live broadcasting with our PUGV ecosystem, we maintain our unique platform advantage. We had 57% more live broadcasting hosts in the third quarter this year than for the same period last year.

The number of live broadcasting paying users increased by 79% year-over-year in the third quarter. The number of premium memberships for the third quarter grew 12% year-over-year to 20.4 million. In December, we plan to launch our self-produced Chinese anime title, The Three-Body Problem. This highly anticipated title is expected to attract a wide range of sci-fi lovers to our platform.

Looking at our advertising. Despite [softness] in macro environment, net revenues were RMB 1.4 billion, an increase of 16% year-over-year. We further strengthened our integrated marketing campaign offerings by combining diverse ad products and conversion modules across different video viewing scenarios.

Story Mode ads, as a part of ad offerings, continued to capture more performance-based ad dollars in the third quarter. Our top advertising verticals in the third quarter were again digital products and home appliance, skin care and cosmetics, automotive and food and beverage.

And for games. Our game revenues grew 6% year-over-year to RMB 1.5 billion, largely driven by the new titles we launched in the domestic and overseas market in the third quarter. Develop in-house and distribute globally remains our core game strategy, which has started to bear fruit. Revenue generated from self-developed games contributed 9% of our total game revenue in the third quarter.

Looking at our pipeline. We have 2 games approved for domestic release this year and earlier next year, including 1 self-developed title. 5 titles are slated to launch in the overseas markets early next year.

Facing the markets' macro uncertainties, our primary goal is clear: improving our gross profit margin and narrowing our net loss. By expediting our commercialization, we believe our top line can catch up with our community's scale. While we remain committed to a goal of reaching non-GAAP operating breakeven by 2024, we will also actively manage our cash position and liabilities. We believe we can weather through the macro uncertainties and emerge as a stronger, more efficient and more resilient company.

This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the third quarter of 2022 and the outlook for the fourth quarter of 2022.

Total net revenues for the third quarter were RMB 5.8 billion, up 11% from the same period of 2021. Our total net revenue breakdown by revenue stream was approximately 25% mobile games, 38% VAS, 23% advertising and 14% from the e-commerce and other business.

Cost of revenues increased by 13% year-over-year to RMB 4.7 billion. Our gross profit in the third quarter was RMB 1.1 billion, and our gross margin was 18.2%. Gross margin recovered by 3.2 percentage points sequentially attributable to the top line growth. We expect to show continued sequential quarterly improvements in the first quarter and the coming year.

Total operating expenses was RMB 2.9 billion, flattish compared with the same period of 2021. We cut sales and marketing expenses by 25% year-over-year to RMB 1.2 billion. Sales and marketing expenses as a percentage of total revenues was also down to 21% compared with 31% in the same period last year.

G&A expenses was RMB 543.4 million, up 14% year-over-year. The increase was mainly primarily due to increased headcount in G&A personnel and higher rental expenses. R&D expenses was RMB 1.1 billion, representing a 43% increase year-over-year. The increase was primarily due to increased headcount in R&D and increased share-based compensation expenses.

Net loss and adjusted net loss was RMB 1.7 billion and RMB 1.8 billion for the third quarter of 2022, respectively. We successfully narrowed our adjusted net loss ratio by 10 percentage points sequentially in Q3, and we expect the narrowing trend will continue in the fourth quarter and the coming years.

Turning to our capital allocation and the liability management. We currently have 3 outstanding convertible bonds totaling USD 2.5 billion, among which the [full price] of USD 746 million is accessible in June 2023, USD 429 million is accessible in April 2024 and USD 1.3 billion is accessible in December 2024.

As of September 30, 2022, we had cash and cash equivalents, time deposits and short-term investments of RMB 23.9 billion or USD 3.4 billion. And we believe this level of liquidity is sufficient to repay the aggregate balance of all outstanding convertible bonds by their respective maturity without considering any external funding resources available to us.

Meanwhile, we are taking further actions to narrow our losses and reaching breakeven. We will be prudent with our CapEx and will closely monitor our cash outflow. At the same time, these convertible bonds are currently traded at discounted price, and we will continue to evaluate the option to repurchase and retail them at a reasonable price.

As of October 31, 2022, we had repurchased and retailed a total principal amount of USD 329 million of these notes for a total cash consideration of USD 247 million, generating USD 82 million net cash position. We will stay opportunistic when continuously evaluating options for the best use of our capital.

Finally, our conversion from a secondary to a primary listing on the Hong Kong Stock Exchange became effective on October 3, 2022. Bilibili is now a dual-primary listed company in Hong Kong and the United States. This conversion will further expand our investor base and provide more liquidity for our securities in the capital markets. With that in mind, we are currently projecting net revenues for the fourth quarter of 2022 to be between RMB 6.0 billion and RMB 6.2 billion.

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

(Operator Instructions) Your first question is from the line of Daniel Chen from JPMorgan.

(foreign language) I will translate myself. So in the previous prepared remarks, management mentioned that the user growth focus will switch into daily active user, DAU. So could you maybe elaborate more about our future user growth strategy?

(foreign language)

[Interpreted] We raised the MA -- centered around MAU strategy back in 2019. And in the past, we have successfully expanded our MAU from 110 million to nowadays 330 million. And this is quite successful and showed our excellent execution in the past few years.

(foreign language)

[Interpreted] Well, we were able to grow 3x in the last few years, which supported the deepest stats. The Bilibili business model, which is the community plus the content ecosystem, works and is quite successful and shows our ability to maintain a high-quality, highly sticky community while we deliver a very impressive user base.

(foreign language)

[Interpreted] Based on our 2022's work progress, we still see a lot of room for our MAU growth. Even in 3Q, we delivered a 25% year-on-year growth. And if we carry on the current strategy, we believe we can still achieve the 400 million MAU target by next year.

(foreign language)

[Interpreted] In 20 -- starting from 2022, we also put a lot of work in terms of the DAU growth because we do believe that DAU compared to MAU can present the quality of the user growth as well as the sustainability of the user growth. In addition, it also directly links to the commercial perspective of our community.

(foreign language)

[Interpreted] Like I said, the growth is not the purpose. It's just a way to achieve our goal of increase the quality of our users. And in the end of the day, the growth of our MAU will directly link to the growth of DAU. And that's why starting from this year, we are putting more emphasis and resources to increase our DAU. And if you look at our DAU-to-MAU ratio, it has already improved from 16 -- 26% in 2021 to 27% in 2022.

(foreign language)

[Interpreted] As you may all aware that we are facing multiple challenges from the macro environment, and putting profitability at first is one of the most important task for the management. The reason why we're putting more emphasis to DAU instead of MAU, we believe from one aspect, it can help us to increase the monetization efficiency, help us to grow our revenue at the same time to reduce our sales and marketing expenses and to achieve breakeven as soon as possible.

(foreign language)

[Interpreted] We are very confident to the DAU growth next year, and we believe this will be more sustainable for the core company as well as be very beneficial to our commercialization efforts. And as for the outlook for next year, we hope to increase our DAU-to-MAU ratio to 30%.

(foreign language)

[Interpreted] Starting from 2022, we have already taken actions to control our sales and marketing expense. In Q3 this year, our sales and marketing expense already declined 25% year-over-year. As we're shifting our focus from MAU to DAU, we expect we can further reduce our sales and marketing expense, and the magnitude of the decline will be even bigger in 2023 compared to 2022.

We'll now take our next question, this is from the line of Lei Zhang from Bank of America.

(foreign language) My question is mainly on the profitability. I noticed that our operating loss narrowed in the third quarter. So how should we look at our gross margin and OP margin trend? And which costs as we see further room to control? Also, any change to our breakeven target?

(foreign language)

[Interpreted] We raised the target of reaching breakeven by end of 2024, and we'll stick to that mission and goal. And as we move through 2022, obviously, there's been multiple challenges across the macro environment. To reduce loss and putting profitability first is the priority for the company, and this is something I personally look after and taking charge.

(foreign language)

[Interpreted] We have already taken actions to reduce our cost and expense. And so far, the unit cost for our server and bandwidth continue to decline. And as I mentioned earlier, sales and marketing continued to decline year-on-year for 3 consecutive quarters. And...

(foreign language)

[Interpreted] Move forward, we'll take more efforts to reduce our sales and marketing expense as well as G&A and R&D expenses.

(foreign language)

[Interpreted] In terms of the efficiency improvement, I intend to reduce investment on the noncore business and allocating and centralize our resources in areas such as improving our commercialization efficiencies.

(foreign language)

[Interpreted] At the same time, we'll also take actions to optimize our organizational structure to reduce the fat and increase the lean, and we expect this adjustment will be completed by end of this year and will start to show on P&L starting from first quarter next year.

Yes, I will take the question in regard to the gross margin and expense trend. The company take on more actions to reduce costs and prioritize profitability. We expect our gross margin will gradually increase going forward. Sales and marketing expense in 2022 has already declined year-over-year, as mentioned by our Chairman, and will continue to decline next year. And we expect R&D expenses, which will peak in Q4 this year and start to decline next year.

In 2023 and the future period, we expect overall operating expenses in absolute dollar terms will decline year-over-year, and net loss will further narrow down until reaching our breakeven target. At the same time, we are paying very close attention to our cash flow and then tightly control CapEx and investment as we narrow our losses. We aim to keep our cash balance at a healthy level.

Next question is from the line of Xueqing Zhang from CICC.

(foreign language) My question regards to advertising. Considering the impact of COVID-19 and the weaker macro environment, what's your strategy for advertising business? And how should we think about revenue growth in the first quarter and the next year? In addition, during the Double 11, we noticed that Bilibili has advertising products related to content e-commerce. Can management share more details about it? And also want to know, is Bilibili considering launching pre-roll ads at the present?

(foreign language)

[Interpreted] Despite weakened macro environment, the ad revenue in third quarter reached RMB 1.35 billion and increased 16% year-over-year. This -- we consider this as a job well done. And especially the ad revenue from performance-related formats increased by over 20% year-over-year, and we have continued to take market share in the ad market.

(foreign language)

[Interpreted] In 2023, we plan to continue to enhance our integrated marketing capability and to build a friendly and welcoming environment for advertisers. And we will continue to help advertisers to effectively reach our young generation through Bilibili's multiple products and multiple using scenarios and help them to build their brand equity.

(foreign language)

[Interpreted] And we intend to further combine our content ecosystem with our ad business, particularly in those -- in our leading verticals, increase our ad inventory and accelerate ad momentum in the consumption and transaction scenarios.

(foreign language)

[Interpreted] For example, we are already among the top 5 market player in verticals like game and 3C and digital products. Another example would be for FMCG ads, which are part of young generation's necessity, continue to grow such as food and beverage, skin care and cosmetics. And as we move forward, we expect verticals like automotive, baby and maternity and home decor and appliances will have great potential especially as the young generation continue to grow with Bilibili as they enter in different life stages. And in Q3, actually, the automotive sector grew over 80% year-on-year within Bilibili.

(foreign language)

[Interpreted] You mentioned about the content e-commerce. I would rather define the content e-commerce in Bilibili ecosystem as a consumption and transaction scenario. First of all, it's an infrastructure for us, and it is also one of the very important scenarios for commercialization. In 2023, we plan to further connect the transaction scenario with Bilibili community and with advertising business.

(foreign language)

[Interpreted] For example, in the past 2 quarters, together with Taobao, Tmall, Jingdong, Pinduoduo and other brand advertisers, we are already starting to explore the seating consumption and transaction model, including video and live broadcasting-based e-commerce as well as traffic acquisition within the Bilibili community. With that, we hope to explore the different commercial values of Bilibili's unique consumption and transaction scenario.

(foreign language)

[Interpreted] During this year's Double 11, despite the weakened macro environment, we still recorded a 47% year-on-year growth for our advertising revenue, among which the performance-based format of advertising revenue grew over 80%. And in the future, we are looking to further expand and be very open about the transaction and consumption scenario. We welcome more of the brand advertiser to join us to further explore the commercial value within our unique ecosystem.

(foreign language)

[Interpreted] As for the pre-roll, which is an old-fashioned format of advertising, it actually only takes about 3% to 5% of the overall advertising market in China, and it's declining rapidly along with its unit price. We believe some people might have been overly optimistic about the pre-roll's potential within Bilibili. And most of the Bilibili content is about 2 to 5 minutes long. If we add pre-roll to all of them, it will not -- it will only generate very limited income but be extremely disruptive to user experience. We believe it will bring more harm than the good, which we will be very cautious to try out.

(foreign language)

[Interpreted] I'll give you some examples of how are we exploring the ad format that's more adaptive to Bilibili's ecosystem. For example, we can explore within the video player frame, such as native ads, bullet-chat ads and other innovative formats within the player frame. Or we can explore the model that combines performance-based ads with both app download conversion module and CPS, we call it a game partner model.

And another example would be the Story Mode ads, which we believe is a very good format to carry on the performance-based ads. And as the Story Mode traffic continued to grow, it will open us more -- it will open more ad inventory to us. Lastly would be the content e-commerce plus user acquisition within the Bilibili model. We'll continue to refine and optimize our goal to improve those performance-based ad efficiency. All of above-mentioned format of advertising, we believe, will generate higher income as well as it's more sustainable to our overall community.

(foreign language)

[Interpreted] We're still very, very confident that our ad business in 2022, 2023 will continue to outperform the overall industry and will continue to take on more market share. Thank you.

We'll now take our next question, this is from the line of Lincoln Kong from Goldman Sachs.

(foreign language) So my question is about the gaming business. Given that, Mr. Chen, you have personally taken control of the gaming business, what's our sort of strategy and targets and any change post your taking over? And after the reduction of the -- mostly the game [Banghao], how is the company? Are you looking for our overall gaming business growth outlook, especially our self-developed games as well as the overseas gaming strategy and progress?

(foreign language)

[Interpreted] I raised the strategy of putting video and game as Bilibili's core business back in 2019. As a matter of fact, Bilibili is starting to explore game business from very early days. Actually, Bilibili is the platform that has the most condensed and concentrated gamer in China. At the same time, we have lots of content offerings in terms of live broadcasting and video on our platform. At the same time, the areas that we invested in the original animation and comics has great synergies with our game business. So naturally, it's just a natural extension and natural course for Bilibili to put game at our core.

(foreign language)

[Interpreted] In the past few years, the game business didn't perform as well as we planned, which I believe is mainly due to the slower-than-expected self-developed game progress. And the reason is that we were exploring in multiple directions by multiple teams at once, but end up spreading too thin and only just to double on many, but didn't bear fruit.

(foreign language)

[Interpreted] As I personally take on the game business, it doesn't mean we are making any change to our original strategy. As a matter of fact, we will carry on more diligently to that strategy, which is develop high-quality game in-house and distribute globally and putting gaming business at our core.

(foreign language)

[Interpreted] I intend to focus on only 1 or 2 directions, focusing our best resource and our energy on doing the least but the best towards the highest industry standards.

(foreign language)

[Interpreted] At the same time, I will strengthen the life cycle management of our self-development projects to increase the investment in projects that meet expectations and quickly iterate out projects that do not meet the expectations.

(foreign language)

[Interpreted] Moving forward, my requirement for the game business will be to be very, very down to earth and do our best to produce the best product and try our best to increase -- to enhance the business. Because we have the perfect environment in game content, I'm still very confident whether it's self-developed games or licensing games, we can deliver sustainable growth in this sector.

We'll now take our next question, this is from the line of Yiwen Zhang from China Renaissance.

(foreign language) So my question regarding live broadcasting. So the integration between the live broadcasting and the media streaming has been on for a while. Can you share more color on that strategy and then discuss our expectation on live streaming business?

(foreign language)

[Interpreted] We think the live broadcasting business has met our expectations this year. The first 3 quarters this year, our live broadcasting revenue grew by 30% year-on-year. And our gross -- live broadcasting's gross margin also starting to recover this year.

(foreign language)

[Interpreted] As I mentioned in the past, we have always believed live broadcasting is a capability for the platform. It's a natural extension of the video format of content. And our strategy has always been combine the live broadcasting ecosystem with our video ecosystem to generate best synergies among these 2.

(foreign language)

[Interpreted] From the supply of content side, we have continuously explored within our ecosystem to convert our content creators to a host and convert our hosts to content creators. In Q3, content creator/host, the number of those content creators/hosts has increased 73% year-over-year, which is a quite impressive growth. And this demonstrates how our strategy is working, and we are increasing the supply side of the content.

(foreign language)

[Interpreted] We are also exploring from the demand side to find -- to discover the users that they might be both interested in the same vertical of content, whether it's in the format of video or it's in the format of live broadcasting. And in the third quarter, we've seen the DAU penetration of live broadcasting continue to increase, and the MPU for live broadcasting also recorded a 79% year-on-year growth. This is also very, very impressive growth.

(foreign language)

[Interpreted] Last quarter, we have combined the operation of live broadcasting with the PUGV. And from an organizational perspective, it's the same team that's looking over the content creators' operation as well as the live broadcasting host operation. And it's also the same team that's paying attention to user, which user is watching certain content category and what kind of live broadcasting content he or she might be interested in. We believe this change are really lining up and align our goals of our operation target, at the same time, it's to increase our overall organization position.

(foreign language)

[Interpreted] And we are combining the operation for the same vertical in terms of live broadcasting and PUGV. And for example, in terms of the VUp content categories, now we are opening up the video materials or video inventory to both VTubers as well as the virtual live -- virtual content creators. This has significantly increased the live broadcasting host frequency of opening up their live broadcasting program and increased our overall content supply.

(foreign language)

[Interpreted] Another example would be the knowledge sector. In the past, we might think that for the knowledge sector content creators, it's difficult for them to monetize through live broadcasting. However, we've discussed in the law area or in the relationship areas, it's very suitable for the live broadcasting host to connect directly with the participants and do a Q&A session. And actually, we have seen one live broadcasting host to gain their -- gain her 1 million follower milestone just through the live broadcasting services. So this will be another example after the execution of the 2 operations, we can explore new opportunities.

(foreign language)

[Interpreted] As such, I'm very confident as the integration further penetrates within the live broadcasting and PUGV, the live broadcasting revenue as well as its gross margin will continue to increase in 2023.

Back to you, operator. I think that's about time for the Q&A session today.

That does conclude the question-and-answer session. So I would like to turn the conference back over to Juliet Yang for any additional or closing remarks.

Well, thank you once again for joining us today. If you have further questions, please contact me, Juliet Yang, Bilibili Executive IR Director, or TPG Investor Relations. Our contact information for IR in both China and the U.S. can be found on today's press release. Have a great day. Bye-bye.

Thank you. This does conclude the conference for today. Thank you for participating, and you may now disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call]