Bilibili Inc (BILI) 2021 Q1 法說會逐字稿

Good day, and welcome to the Bilibili 2021 First Quarter 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, Senior Director of Investor Relations. Please go ahead.

Thank you, operator. During this call, we will discuss our 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 filings 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 a reconciliation table are available in the news release we issued earlier today.

As a reminder, this conference is being recorded. In addition, an investor presentation and a webcast replay of this conference call 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 2021 first quarter results conference call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen.

"2021 is off to an excellent start for Bilibili. On March 29, we successfully completed our secondary listing on Hong Kong Stock Exchange, 3 years after we listed on NASDAQ. We would like to take this opportunity to thank our supporting shareholders as well as our talented content creators, loyal users and dedicated colleagues that helped make this happen. With our secondary listing, we see an opportunity to broaden our investor base and attract more high-quality shareholders. We also gain more strength in the capital markets, laying a solid foundation to better execute our growth strategy and tap into the massive video-based market in China in the coming years.

After officially stepping into the 200 million MAUs club in 2020, we continued the momentum, further increasing our influence among China's Gen Z+ cohort and expanding our user base. In the first quarter of 2021, our MAUs were up 30% to 223 million, and our mobile MAUs grew by 33% to 209 million, both on a year-over-year basis. And our DAUs reached 60 million, up 18% year-on-year. This is particularly impressive given last year's remarkable high base.

As a testament to our rich offerings and engaged community, our users spent an average of 82 minutes per day on our platform in the first quarter. During this time, we rolled out more premium content and services and strengthened our commercialization capabilities while converting more traffic to paying users. Our MPUs grew to 21 million, increasing by 53% versus Q1 2020, and our paying ratio hit a record high of 9.2% compared with 7.8% from same period last year.

Advertisers are widely recognizing Bilibili as the destination to reach young generations. As a result, our ad revenues once again achieved accelerated growth, increasing by 234% year-over-year. On the back of this strong momentum, our total revenues reached RMB 3.9 billion, up 68% and our gross margin improved to 24% from 23%, both compared with the same period of last year.

Throughout the first quarter, we continued to enrich our content offerings and enhance our mindshare as the go-to video community for Gen Z+. Entering their 20s and 30s, Gen Z+ is deeply influencing society and mainstream ideals as well as driving all kinds of consumption in China. By offering diversified content in great breadth and depth, we aim to further increase our market share among this core Gen Z+ user base while expanding our appeal to all video users. We are confident we are on the right track to achieve our 3-year user target.

One of the primary drivers for our next wave of growth is anchored by the increasing trends in videolization, where video has become pervasive across many scenarios of daily life. As China's leading video community, we are the clear frontrunner in this transformative opportunity, and we are only at the beginning stages of this rapidly growing trend. According to iResearch, China's video-based market will comprise nearly 1.2 billion video users and more than RMB 1.8 trillion in revenues by 2025. Over the next few years, we are committed to capturing this exciting market opportunity with videolization adding tailwinds to our growth trajectory.

With that overview, I would like to go through our operations for the period in a bit more detail, beginning with our content. Our PUGV community remains the center of our content ecosystem, representing 91% of our total video views. For the first quarter, we had approximately 2.2 million content creators uploading 7.7 million videos per month, representing increases of 22% and 57%, respectively, both year-over-year. We strive to create an ideal home for all video creators where they can employ their ingenuity, build a fan base and monetize their talent.

We continue to invest in algorithm improvements to ensure that our content creators can easily locate the audiences who most appreciate their work. In the first quarter, the number of content creators with over 10,000 followers increased 54% year-over-year. At the same time, our advertising platform, Sparkle, continues to connect more content creators with advertisers while cash incentive programs supported over 375,000 content creators in Q1.

We also maintain an upbeat and encouraging community atmosphere that provides a supportive environment for lifelong content creation. As a full-spectrum video community, we aim to offer a wider and deeper range of content to meet the growing demand of our users. In the first quarter, the most viewed content verticals on our platform were lifestyle, games, entertainment, anime and tech and knowledge.

In recent quarters, we have seen increasing numbers of both content submissions and video views about games, knowledge and animal-related content. Moving forward, we plan to further expand our content offerings in relationships, fitness and automotive. These categories reflect the interest of Gen Z+ while also expanding our appeal amongst a broader audience.

Turning to our OGV content. Supplementing our video content ecosystem, our OGVs provide an effective gateway that reinforces our leading verticals and explores new territories. For example, our investment in Chinese animation has been a huge boon for our ACG categories, successfully attracting old users and new ones. Advancing our Chinese animation production capabilities, in January, we acquired Haoliners Animation League, (foreign language), one of China's top anime studios. Its highly popular production, Heaven Official's Blessing, (foreign language), launched in late 2020, continued to win over followers in the first quarter, reaching 370 million video views, over 6 million likes and collecting around 4.5 million bullet-chats. We also released multiple new original Chinese anime titles in April, including final chapter of Ling Cage, Ling Long; and Link Click, (foreign language), which were immediate hits, trending on social media for weeks.

Turning to our documentaries, variety shows and TV and movie categories. To satisfy users' diverse needs, we launched several hit productions in Q1, including our highly anticipated New Year's Eve Gala, The Most Beautiful Night of 2020; and the Bilibili Chinese New Year Gala. Our self-produced documentaries, Peculiar Foods, (foreign language) and Little Giants, (foreign language); and the self-produced reality show, Shall We Eat at Your House, (foreign language), all of which were welcomed by our Gen Z+ users. In the second half of this year, we have plans to introduce 2 more self-produced music and dating-themed variety shows. These shows are geared towards users with relevant interests and supplement the newer music and the relationship series in our content ecosystem.

Turning to our community. The bonds that were created with Bilibili and the community members remain strong. Despite the spike in the interactions and use that we saw in 2020, making the comparable base quite high, our first quarter community activities continued to be robust. Daily video views were up 47% to 1.6 billion and the monthly interactions increased by 35% to 6.6 billion, both compared with Q1 2020. By the end of first quarter, we had 112 million official members, up 38% year-over-year, and our 12-month retention rate remained around 80%. We are very proud of these metrics as they demonstrate the strength of our model, bonding our users and community closer.

Now let's look at our commercialization progress. Our diversified monetization strategy is working. Growing each of our commercial avenues in the first quarter, we now have a robust line of revenue streams born out of our solid mobile game business, thriving VAS business as well as our rapidly growing advertising business.

Starting with our games. Revenues from our mobile game business was RMB 1.2 billion in the first quarter, an increase of 2% year-over-year. At the end of April, we successfully launched and are the exclusive distributor of the mobile game Guardian Tales, (foreign language). This thrilling ACG title has won over millions of new followers, topping the iOS game download and grossing charts for weeks after its release. Other existing games that we operate, including Fate/Grand Order, Azure Lane and Princess Connect!, remained popular among their followers during Q1.

As for our jointly operated games, Genshin Impact, (foreign language), had another solid run in the first quarter. Derived from classic anime IP, we also added Yu-Gi-Oh!, (foreign language), to our jointly operated game library in January. With China's mobile games market expected to reach over RMB 500 billion in 2025, according to iResearch, we're strategically invested in XD.com and the CMGE Technology Group, further strengthening our position in the game industry.

Turning to our game pipeline. 12 of the games we hold exclusive licenses have acquired approval for the release. These include Artery Gear, (foreign language), a thrilling ACG title; and Sword Art Online, (foreign language), an exciting MMORPG. Both are slated for launch in the second quarter. We continue to work with top developers to bring more jointly operated games to Bilibili users. These highly anticipated titles include Tencent's League of Legends, (foreign language); as well as NetEase's Harry Potter.

Turning to our VAS business. Our VAS services soared in the first quarter. With our premium members reaching a record high and robust growth in live broadcasting, revenues for our VAS grew to RMB 1.5 billion, an increase of 89% year-over-year. At the end of the first quarter, we had 16.1 million premium members, representing a year-over-year growth of 48%. This is particularly impressive, again, given the high base in 2020 for comparison. It also shows that our core Gen Z+ demographic have spending power and a high willingness to pay for high-quality and premium content.

As part of our video content ecosystem, we continue to build our game and entertainment content, addressing our users' diverse needs. We have won a number of high-quality e-sports content contracts, including live broadcasting rights of League of Legends World Championship and more recently acquired League of Legends Pro League in China. Additionally, our V-tuber and other entertainment live broadcasting continue to draw young users' attention. As we explore more ways to integrate live broadcasting content with our video platform, we see great potential to expand this business even further.

Last but not least, let's review our advertising business. Beginning with the success of our 2020 New Year's Eve Gala, a wider variety of advertisers came to Bilibili to reach their desired audience of young generations. Revenue from our advertising services were RMB 715 million, up 234% year-over-year, representing our eighth quarter of accelerated growth.

For the first quarter, the top 5 leading advertising verticals was games, digital and 3C products, food and beverage, e-commerce and skin care and cosmetics. Increasing improvements to ad distribution algorithms also supported our advertising business growth. As we continue to enhance our brand awareness, increase our influence among the Gen Z+ demographic and improve our ad products, we are confident that advertising dollars are sure to follow.

Building on the momentum of last year, we are off to a great start in 2021. Our financial and operational accomplishments across our content, community and commercialization in Q1 place us on firm footing to achieve our next phase of growth. We entered a new era where the transformation to videolization is taking shape as we speak. As a full-spectrum video community and the go-to platform for the Gen Z+ demographic, we have reached a new starting point from which to grow. Riding the videolization wave, we will continue to invest in our content ecosystem and enhance our brand among the rising and massive video market, where we are established leaders and continue to gain market share." This concludes Mr. Chen's remarks.

I will now provide a brief overview of our financial results for the first quarter of 2021 and outlook for Q2. Total net revenues for the first quarter were RMB 3.9 billion, up 68% from the same period of 2020. We continue to see a more balanced and diversified revenue mix. Our total net revenues breakdown by revenue stream was approximately 30% mobile games, 38% VAS, 18% advertising and 14% e-commerce and others business.

Cost of revenues increased by 66% year-over-year to RMB 3 billion. Revenue-sharing cost, a key component of cost of revenues, was RMB 1.4 billion, also a 58% increase from the same period in 2020. Gross profit increased by 77% year-over-year to RMB 937.9 million. Our gross margin improved to 24% in the first quarter compared with 23% from the same period last year.

Total operating expenses were RMB 1.97 billion, up 83% from the same period in 2020. Selling and marketing expenses were RMB 1 billion, representing a 65% increase year-over-year. The increase was primarily attributable to the increased channel and marketing expenses associated with our app and brand as well as the increase in sales and marketing personnel. By allocating resources to build our brand and appeal among broader audience, we achieved substantial growth in 2020. We believe the effects will be even farther reaching with positive impact to the market over the long run. This is a continuation of the momentum we achieved in 2020, and we can already see the benefits of the strategy through our broadening user base demographics, content and overall industry leadership. We plan to continue building on this track in 2021 to further strengthen and expand our virtuous growth cycle.

G&A expenses was RMB 389 million, representing 127% increase year-over-year. The increase was primarily due to increased headcount in general and administrative personnel, increased share-based compensation expenses, higher rental expenses and other G&A expenses.

R&D expenses were RMB 580 million, representing a 95% increase year-over-year. This increase was primarily due to increased headcount in research and development personnel and increased share-based compensation expenses.

Net loss was RMB 905 million for the first quarter of 2021 compared with RMB 539 million in the same period of 2020. Adjusted net loss, which is a non-GAAP measure that excludes share-based compensation expenses and amortization expenses and income tax expenses related to the intangible assets acquired through business acquisitions, were RMB 666 million compared with RMB 475 million in the same period of 2020.

Basic and diluted net loss per share were RMB 2.54. Adjusted basic and diluted net loss per share were RMB 1.87.

As of March 31, 2021, we had cash and cash equivalents, time deposits as well as short-term investments of RMB 27 billion compared to RMB 12.8 billion as of December 31, 2020. With that in mind, we are currently projecting net revenues for the second quarter of 2021 to be between RMB 4.25 billion and RMB 4.35 billion.

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

(Operator Instructions) Your first question comes from the line of Alex Poon of Morgan Stanley.

(foreign language) The question I have is regarding advertising business. We have seen continuous acceleration in year-over-year growth for 8 consecutive quarters. Could management share with us the drivers behind this growth and how should we think about the growth in the next 1 to 3 years?

(foreign language)

Okay. I'll briefly translate for Ms. Carly Li.

[Interpreted] So we think the value of platform's advertising business actually equals the value of the user itself. An also accurate metaphor would be many other platforms out there, they are running a rental or a tourist model. You never know when your user will come, when they will go. So the easiest way is to leverage advertising to quickly achieve monetization and use the money that they make to buy more content. This is the traditional Internet model.

But for Bilibili, what we are trying to do is to build a city. We are trying to gather the young users with similar interests, ask them to become residents of this city. We provide different types of consumption scenarios to them to cater their needs, including -- such as games, live broadcasting, movie and content and derivative products and even offline activities. And they will grow fond of the city and even fall in love with it, and they'll be inviting more friends to join the neighborhood. And for this process, it might start really -- probably start really slow. But once the momentum is built, it will accelerate and have great potential.

(foreign language)

[Interpreted] So what is Bilibili's advertisement potential? Look at the residents. We have captured near half of China's young generation. On our platform, the average age of our user is about 22.8 years old, and 86% of our user is age 35 and below. And our user, about 50% of them are -- live in the first and second-tier city.

They are -- deeply influence the mainstream ideals, and they are the key driving force for all kinds of consumption. And they are the most wanted cohort that's chased by all advertisers. So we believe, in the next few years, as Bilibili continues to grow its brand awareness and expand the boundary of our content offerings, we will be welcoming more diverse and more dynamic type of user to join our city and continue very healthy and fast growth.

(foreign language)

[Interpreted] So we are quite confident that pretty much all of the brands, they will be looking -- turning to Bilibili and become part of our community. And secondly, we think a good advertisement could also be a good content, and for a user, they never repel good content.

So on the customer side, we'll continue to work with high-quality brand and potential brand to establish deep collaboration and to build various success cases for all the key accounts. And we'll also continue to improve our product, algorithm efficiencies and launch more creative and interesting integrated marketing solutions across multi scenarios and multi devices.

(foreign language)

[Interpreted] And additionally, we think there's a very big portion of the creativity that we could leverage our content creators. We are working with content creators to pick their brand -- to pick their minds, to ask them to work with our brand advertisers together. And on the Sparkle advertising platform, currently, we already have over 10,000 content creators join this platform, and the overall performance is exceeding our expectations.

(foreign language)

[Interpreted] So last but not least, it's also very, very important as that will continue to enhance our middle platform capabilities and continue to improve our ad product, including the integrated marketing solutions that combines both brand ads and performance ads. And our advertising power will not only be reflecting on the increase of our advertising revenue but also on many of our customer business such as the efficiency of our jointly operated games and live broadcasting, et cetera.

(foreign language)

[Interpreted] So for the next 1 to 3 years, as we continue to grow our content ecosystem and extend the boundary of our content offering, we are quite confident to maintain a healthy and fast advertising dollar growth.

Your next question comes from the line of Lei Zhang of BofA Securities.

(foreign language) My question is mainly about user engagement. We noticed that some key indicators like DAU versus MAU, interaction and time spent saw sequential improvement. So wondering, can you share with us what's the trend going forward? And what is your plan to further improve user engagement?

(foreign language)

[Interpreted] So indeed, from last year, we see a temporary drop from -- for the DAU to MAU ratio. And we have to look into the reason behind it. And the reasons are not -- it's not because there's some metrics decline, but for the certain period of time, the growth rate of our MAU exceeded significantly our DAU.

(foreign language)

[Interpreted] So we think the temporary drop is fully normal given that last year, we have raised our MAU target, and we are really focusing on growing our overall users. And during that process, we think this is just a temporary effect given that when a user joins the community, it really takes time for them to become a part of the community. We need time to cultivate user habits and establishing community behavior such as following different content creators. They have to get in touch with the content creator and other users in the community. And if they come to Bilibili for one specific interest point, they also need time to establish and expand their interest points on Bilibili. So all of that takes time, and there will be some lag during the process.

(foreign language)

[Interpreted] So we think for a product like Bilibili, we actually stand at pretty good DAU to MAU ratio in terms of the community product. And because we also have very vast content offering, we think during a fast user growth period, a temporary drop of the engagement ratio is absolutely normal. And as long as we see the ratio starting to bounce back and we continue to maintain a very fast user growth pace, it should be fine.

(foreign language)

[Interpreted] And we will definitely continue to be very focused on elevating the engagement level. And there are several ways. One is to -- whether we can help our users to become part of the community a little bit quicker. And the measurement would be help them to connect with more content creators, follow -- allow them to follow more content creators that fits their interest, allow them to establish more engagement between content creators and other users.

(foreign language)

[Interpreted] And secondly is on our AI-powered recommendation system, we will continue to improve the recommendation efficiency to allow our algorithms to cover more interest points for certain users and to push more relevant content that fits to different users' need. And for that, we'll continue to invest in R&D in our algorithm to improve our AI-powered recommendation system.

(foreign language)

[Interpreted] So these above-mentioned points will be our constant areas for improvement.

Your next question comes from the line of Zhijing Liu of UBS.

(foreign language) I have one question. Recently, we see Bili has quite a few investment deals on other game-related companies. What's the reason behind? Are we going to consider more acquisitions or investments in this space for coming quarters?

(foreign language)

[Interpreted] So I always say that game is one of the most important business for Bilibili, because, for us, it's not only just the monetization, it's also a very important component of our content. And there's just great synergies between our game offerings as well as our video game-based -- game-related video content. And for Bilibili, for this game -- particular game business, it's just very natural. As long as we're starting to offer better content, the monetization just happen very naturally.

(foreign language)

[Interpreted] So second of all, we think, for game industry, there's still plenty of room for growth. I believe that in the next few years, there could be multiple times growth for this segment. So I personally take great care and put in a lot of effort in looking into this market.

(foreign language)

[Interpreted] And for Bilibili, it's not just game department that's dealing with or facing the game industry. It's across all business departments, and it's through our whole company. For example, game-related video content has always been our top 3 content verticals. And for our live broadcasting, game-related live broadcasting is our #1 content on our platform. And we are also working with the majority of the game content developers in this industry, establishing close partnerships.

(foreign language)

[Interpreted] And for the game distribution business, currently, it's playing a very important role in our business, and it's also contributing a very decent portion of our revenue.

(foreign language)

[Interpreted] So why we wanted to invest in this area? Because we wanted to establish strategic collaborations. Like I mentioned, there's multiple departments jointly working in the game space. So the reason why we invest in this area is hoping to further enhance our partnership across different legs of our business.

(foreign language)

[Interpreted] So for example, the investment we made in Xindong is because we see a lot of synergies and collaboration in terms of game distribution. So all of the investment that we make has a prior purpose of establishing strategic collaborations.

(foreign language)

[Interpreted] And that goes the same with our investment in other area. The purpose is hoping to achieve business collaboration and achieve business synergies across different departments.

Your next question comes from the line of Daniel Chen of JPMorgan.

(foreign language) I will translate myself. My question is on the -- I would say, more on the product side and on the content side. So as we target to reach 400 million MAU by 2023, I was wondering what's our plan in 2021 in terms of product feature innovation and content genre expansion.

(foreign language)

[Interpreted] So Bilibili's growth model is content ecosystem driven and essentially is through our content creator producing more and more high-quality content across different content verticals and attract more users. And what we are -- what we have been constantly doing is to build such platform to keep attracting more content creators.

(foreign language)

[Interpreted] So what we have been doing is to focus on the category that can attract young users, can resonate with young generations. And over the years, we have established unparalleled leadership in categories like games, lifestyle, entertainment, knowledge and digital products. And step-by-step, we continued to be more and more diversity of content and more and more high-quality content. As we move forward, we'll be focusing on improving the diversity of that content and continue to select more high-quality content and to attract more wider range of content creators.

(foreign language)

[Interpreted] And move forward for this year, while we continue to enhance our leader categories such as knowledge and lifestyle-related content, we aim to further expand our content offering in categories like relationship, automotive, animal related, fitness and health, those categories that fit the Gen Z+ interest points and also open up us to more wider demographics.

Your next question comes from the line of Jialong Shi of Nomura.

So my question is about the live broadcasting service. Can you give us some colors on the growth trend for your live broadcasting service? We saw an industry-wide slowdown in this live broadcasting revenue since last year. Just wonder what is the outlook for the live broadcasting service this year and for the next few years? (foreign language)

(foreign language)

[Interpreted] So 2 years ago, I forecasted our live broadcasting business will keep a very high growth rate. The reason why I said that is because I believe Bilibili's live broadcasting has always been a part of the PUGV content ecosystem. It's a natural extension of video content. And as a matter of fact, live broadcasting should be part of the video product.

(foreign language)

[Interpreted] So once again, that live broadcasting is a natural extension of Bilibili's overall content ecosystem. We don't need to deliberately expand the content categories. We don't necessarily have to pay extra high price to attract live broadcasting host. All of the content offerings is growing out of our content ecosystem. It's based on our content creators. It's based on the popular content on our video platform.

(foreign language)

[Interpreted] So like I mentioned earlier that our video -- on our video platform game is our top 3 content vertical, and it's the #1 content vertical on our live broadcasting business. And for the game categories, the live broadcasting host and the video content creator has 40% overlap.

(foreign language)

[Interpreted] And lifestyle and entertainment-related content is also very popular. And entertainment live broadcasting is also our second most popular live broadcasting content.

(foreign language)

[Interpreted] In many cases for Bilibili, our content creators are our live broadcasting host. And the video content -- it's a mutual beneficial relationship. We think the live broadcasting can help our content creators to establish better interaction with their followers, and their video submission can feed back to their live broadcasting traffic. And on the other hand, we think live broadcasting is a good avenue for content creators to monetize their traffic. So on Bilibili live broadcasting and video, they are born to be together, and they have great synergies.

(foreign language)

[Interpreted] So from my perspective, I think Bilibili's live broadcasting is still at the early stages and has great potential to grow. Currently, we have over 2 million monthly active content creator. In my view, pretty much everybody could potentially become a live broadcasting host. So there's great growth route ahead of us.

(foreign language)

[Interpreted] So I think the nature of live broadcasting was never just about monetization. It's more of an ability. It's ability of our platform, it's also ability of our content creator. For the content creator, they can leverage live broadcasting to connect with their followers, to improve their relationship and also they can gain monetary rewards.

(foreign language)

[Interpreted] So I believe this type of capability should be widely adopted in the future. It's like our content creator can write an introduction of the video, can create a cover page for a video. And probably in the next few years, every content creator would have the ability to do live broadcasting.

(foreign language)

[Interpreted] And our live broadcasting business is really internally grown. It's growing from our content ecosystem. So the external environment will not really have any impact on our live broadcasting business because we don't need to acquire live broadcasting host from other platform. Everything is organically grown within our ecosystem.

And that concludes the question-and-answer session. I would like to turn the conference back over to management for additional or closing comments.

Thank you once again for joining us today. If you have further questions, please contact me, 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 on today's press release. Have a great day. Bye-bye.