Bilibili Inc. (NASDAQ:BILI) Q1 2023 Earnings Call Transcript June 1, 2023

Bilibili Inc. misses on earnings expectations. Reported EPS is $-0.77 EPS, expectations were $-0.41.

Operator: Good day, and welcome to the Bilibili First Quarter 2023 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.

Juliet Yang: Thank you, operator. During this call, we’ll 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 filing with the SEC and Hong Kong Stock Exchange. The non-GAAP financial measures we provide are for comparison purpose only. Definitions of these measures and a reconciliation table are available in the news release we issued earlier today. As a reminder, this conference call 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.

Rui Chen: [Interpreted] Thank you, Juliet. And thank you everyone for participating in our 2023 first quarter conference call. I’m pleased to deliver today’s opening remarks on behalf of Mr. Chen. Our top priority for 2023 is to improve our commercialization efficiency and narrow our losses. Our first quarter results demonstrate that we are making solid progress on these goals. First, we delivered over 20% year-on-year revenue growth from our advertising business. Our gross margin improved to 22% in the first quarter, up from 16% a year ago, driving gross profit to increase by 37% year-over-year. Second, we continue to take measures to strengthen the execution of our expense controls. As a result, we reduced total operating expenses in the first quarter by 11% year-over-year.

Specifically, we cut our sales and marketing expenses by 30% year-over-year while continuing to expand our DAUs. These actions are proving effective in strengthening our bottom-line. In the first quarter, we narrowed our net loss by 72% year-over-year. The progress we have made gives us confidence that we are on the right track to achieve our break-even target. While we focus on improving our financial metrics, we continue to attract more users and enhance the engagement levels of our community. In the first quarter, our DAUs grew by 18% year-over-year to 93.7 million, while our MAUs reached 315 million, driving our D/M ratio up to 29.7% from 27 % a year ago. Our users continue to value our evolving and diverse content with the average user daily time spent on Bilibili reaching 96 minutes in the first quarter.

This brought the total time spent on our platform up 19% year-over-year. As we move through the year, we will continue to cultivate our DAUs in a cost-effective manner, streamline our organization and improve our overall commercialization efficiency. In this way, we can better allocate our resources to areas that can further solidify our community. Namely, we are working to expand our creator base and help our creators make more money. We will also continue to invest in commercialization capabilities, including improving our ad infrastructure, further integrating live broadcasting and video operations, developing high-quality in-house games, as well as exploring AIGC opportunities in our content community. All of which will help us build a tighter community and unleash more commercial potential of our platform.

With that overview of our progress, I’d now like to provide a brief update on our three core pillars: content, community and commercialization. Starting with content. Our content creators are an essential component of our ecosystem. We are dedicated to building a community that enables them to be recognized and be rewarded. As we provide more user-friendly editing tools, professional content operations support, and improved traffic distribution mechanisms that favor long- to mid-tail content creators, we can increase the volume of content creation and attract more creators to our platform. In the first quarter, the number of our daily active content creators increased by 42% with a 79% increase in monthly content submissions, both on a year-over-year basis.

By further integrating our commercial channels within our content ecosystem, we continued to empower more content creators to realize their commercial value through diverse avenues. Different content creators can monetize their talent from what they are good at, such as advertising, live broadcasting, online paid courses and workshops. Leveraging our platform and support, over 1.5 million content creators earned income through multiple channels in the first quarter, an increase of 50% year-over-year. Among them, the number of content creators who earned income via channels, other than our cash incentive program, increased by over 55% year-over-year. Going forward, we will continue to develop more channels and products to enable our content creators to achieve their commercial value.

Our multi-scenario products, such as Story Mode, also continue to attract broad attention from our users and satisfy their diversified video-watching preferences. For the first quarter, our total daily video views increased by 37% to 4.1 billion. Story Mode’s daily video views grew by 82% and PUGV video views were up 26% in the first quarter, both on a year-over-year basis. Solid consumption trends in Story Mode are ongoing and continue to present more opportunities for cultivating our DAUs, enhancing community engagement levels, as well as increasing our commercialization potential. In addition, we are exploring the integration of AI applications into our content ecosystem. Utilizing AIGC can enhance both content creation efficiency and our user experience.

We believe it holds great promise and tremendous potential for the video industry. Leveraging these evolving technologies, we can further enrich our content supply, empowering our creators to bring their visions to life more easily and effectively. We are also beta testing new features powered by AIGC to further enhance user experience. As for our community, our user base remains sticky and highly engaged. The users’ average daily time spent on Bilibili continued to show stability at 96 minutes. Monthly interactions were also up 15% year-over-year to 14.2 billion. Our core user cohort of official members reached 205 million in the first quarter, showing a 29% increase year-over-year. The 12-month retention rate for official members also remained around 80%.

Our loyal and active community allows us to explore more diverse and community-based exclusive products and services, further opening up more commercial opportunities. Now, let’s review our commercialization, where we are improving how we monetize our offerings to drive margin expansion and narrow our losses. For the first quarter, our total revenues reached RMB5.1 billion. Specifically, revenues from our advertising business increased by 22% year-over-year. We continued to take proactive steps to improve our commercialization efficiency to support our top-line and increase our gross margin at the company level. Looking at this in more detail. First, revenues from our VAS business increased by 5% year-over-year to RMB2.2 billion for the first quarter, mainly driven by the growth of our live broadcasting business.

We continue to integrate our live broadcasting capabilities within our video ecosystem. As one of the primary ways for creators to monetize their talent, more creators are making the transition to live broadcasting hosts. In the first quarter, the number of monthly active live broadcasting hosts increased by 34% year-over-year and the number of live broadcasting paying users increased by 15% year-over-year. We have also improved the gross margin of live broadcasting business on both sequential and year-on-year basis, and we expect the trend will continue. By the end of March, we had 20.2 million premium members. Over 80% of these were annual or auto-renew package subscribers, which represents users’ strong trust in our brand and content offerings.

Turning to our advertising business. Our ad revenues increased by 22% year-over-year to RMB1.3 billion in the first quarter, largely resulting from our ad infrastructure improvements. Over the past year, we have expanded and optimized our ad product offerings. At the same time, we have been continuously building our commercial database and improving our ad algorithm to drive better ROI for our ad clients. The results are encouraging. Performance-based ad revenue recorded nearly 50% year-on-year growth in the first quarter, while brand ads and native ads also recorded positive year-on-year growth. Our top performing verticals for the first quarter were game, digital products and home appliances, e-commerce, skincare and cosmetics, and automotive.

Users are showing increased spending power and diversified consumption needs as they grow into new life stages. This dynamic is attracting more advertisers from broader verticals to our platform, such as automotive and home appliances. Looking now at our game business. Revenues for the first quarter were RMB1.1 billion. As the rate of game approvals begins to normalize, we welcomed more titles into our pipeline. We plan to release eight new titles in domestic markets in coming quarters. These include Cygames’ highly anticipated game Pretty Derby [Foreign Language] our first self-developed game in the female romance genre, and our self-developed ACG card game Eruthyll. In addition, we successfully co-published HonKai: Star Rail [Foreign Language] in April and Reverse: 1999 [Foreign Language] in May, demonstrating our strong distribution capabilities.

Turning to our IP derivatives and others, previously known as e-commerce and others. Revenues for the first quarter were RMB510 million, a decrease of 15% year-over-year. The decrease in revenue was mainly due to a proactive strategy shift to focus on increasing profitability. In the first quarter, margin for IP derivatives and others improved meaningfully by this approach and we expect it will continue to improve going forward. Lastly, we recently published our 2022 annual ESG report which highlights the value we create and bring to young generations in China. We are committed to shouldering our social responsibilities, fostering a welcoming community for our users and creators, and working towards a sustainable future for all. In summary, the actions we have taken are effectively improving our financial performance and operating capabilities, while we continue to grow our dynamic community.

Throughout this year, we will further execute our strategy and continue to expand our gross margin and narrow our losses. This concludes Mr. Chen’s remarks. I will now provide a brief overview of our financial results for the first quarter of 2023 and our outlook for the year.

Sam Fan: Total net revenue for the first quarter was RMB5.1 billion, flat compared with same period last year. Our total net revenue breakdown by revenue stream was approximately 43% VAS; 25% advertising; 22% mobile games; and 10% from our IP derivatives and others. Our cost of revenue decreased by 7% year-over-year, driving our gross profit to RMB1.1 billion, up 37% year-over-year, while our gross margin was 22%, up from 16% for the same period last year. With our tightly controlled cost structure, we expect to show continued margin improvement throughout 2023. Our total operating expenses were down 11% year-over-year and 31% quarter-over quarter. We are maintaining tight control of our expenses while we work to increase our commercial prospects.

We cut sales and marketing expenses by 30% year-over-year, while our DAUs grew by 18% year-over-year. As a percent of total revenue, sales and marketing was 17%, compared with 25% in the same period last year. G&A expenses were RMB572 million, up 7% year-over-year. R&D expenses were RMB1 billion, representing a 2% increase year-over-year. We expect to continue strict control of our operating expenses going forward. Our net loss and adjusted net loss were RMB630 million and RMB1 billion, narrowing by 72% and 38%, year-over-year, respectively. Our net loss ratio in the first quarter was 12%, narrowed from 45% for the same period a year ago. Turning to our capital allocation and liabilities management. We currently have three outstanding CBs that total US$1.6 billion.

Among these, a total principal amount of $746 million of 2027 CB has an upcoming put rights which are exercisable through June of this year. As of March 31, 2023, we had cash and cash equivalents, time deposits and short-term investments of RMB19.4 billion, or US$2.8 billion. We believe this amount is sufficient to cover all our remaining convertible — CBs and fund our future operations, including the put rights on our 2027 CBs. With that in mind, we reiterate our expectations for net revenues for the full year of 2023 to be between RMB24 billion and RMB26 billion. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Q&A Session

Operator: Thank you. [Operator Instructions] Now, we’re going to take our first question. And the question comes from the line of Daniel Chan from JPMorgan. Your line is open. Please ask your question.

Daniel Chan: [Foreign Language] I will translate myself. So, I have a question related to the user growth. So, we saw that — we have — under the situation that of lower sales and marketing expense in the first quarter, we actually have a sustainable growth of daily active user in the first quarter and higher DAU to MAU ratio in the first quarter. So, could management maybe share a little bit on the future user growth outlook and also strategy? Thank you.

Rui Chen: [Foreign Language] [Interpreted] Like I said on previous earnings calls, we have adopted a more quality oriented approach to user growth. And by quality, I’m specifically referring to DAU growth. At this current stage, one of our top priorities is to improve the efficiency of commercialization, high-quality DAU growth and user engagement are the cornerstone of strengthening commercialization. This quality-oriented user growth strategy means that we have to pivot away from MAU to a DAU. And over the last several quarters, we have achieved sales and marketing expense reductions while our DAU number continued to climb up. In Q1, sales and marketing expense was down by 30%, but our DAU increased by 18% to 93.7 million.

So, compared to MAU, DAU is a better indicator of user engagement and commercialization potential. And our strategy will continue to focus more on DAU going forward? And will you use this indicator to monitor our performance and drive up average user data time spent and DAU/MAU ratio. Building on a stable MAU, we now want to further improve retention and engagement. In Q1 DAU to MAU ratio grew to 29.7% and average user daily time spent reached 96 minutes. Going forward, we expect to see further increase in the DAU to MAU ratio. Going forward, I think Bilibili’s business model is one of a virtuous cycle, because content creators, the content supply and the quality of content here means that we’re able to attract high-quality users. And the community here means that those users will stay and they will remain engaged, and then, that creates momentum for the content creators to generate even better content.

So, this is like a virtuous cycle. That’s why looking at our user growth trend, I think we’ll be able to continue to grow our DAU in the future.

Operator: Thank you. Now, we’re going to take our next question. Please standby. And the next question comes from the line of Yiwen Zhang from China Renaissance. Your line is open. Please ask your question.

Yiwen Zhang: [Foreign Language] My question is regarding advertisement. You delivered 22% Y-o-Y growth in ad revenue, which was faster than industry average. Can you share more color on how we improved our ad products and efficiency? And what is our view on 2023 ads market? Correspondingly, what kind of strategy shall we adopt in this market? And then, lastly, recently, we observed many e-commerce explorations in either video format or live streaming format. What is our [advantages] (ph) — progress there? Thank you.

Carly Li: [Foreign Language] [Interpreted] So, in Q1, we saw that advertising market in China started to [warm up] (ph) and is expected to achieve double-digit growth. But at Bilibili, our growth in Q1 was 22%, which I believe is greater than the industry average. And of course, we managed to capture more market share. If you look at the performance ads specifically, the year-on-year growth for us was higher than 50%, five-zero. Just like Mr. Chen mentioned, in the context of healthy DAU growth, we’re very confident that this will feedback into our advertising revenue growth. And specifically, I think our ad business is driven by both horizontal and vertical improvements as well as by new opportunities that come with vibrant transactions in our community.

By horizontal improvement, I’m referring to strengthening technical and data capabilities on the middle platform for greater ad efficiency. First, algorithm optimization can help increase the ratio of so-called deep conversion, which commands higher eCPM than shallow conversion. Take gaming industry, for example, the ratio has now increased to 35%. Second, we want to increase the supply of commercial traffic. Users’ commercial behavior is now one of the indicators we monitor for traffic management. We want to ensure the sound user experience while leveraging the user LTV model to make dynamic adjustments in the ad load. Thirdly, [data structure] (ph) is also essential. We’ve established a science-backed marketing methodology. In 2022, we put forward the Make model, which helps clients refine their advertising plans prior to ad purchase, and then help them measure the outcome afterwards.

But this model was further validated in the auto and FMCG sector in Q1. And lastly, AIGC will also contribute to ad operation and the conversion efficiency. So that’s what I’m talking about when I said horizontal improvement by the middle platform. As for vertical improvements, starting last year, we’ve been building and creating tailored models for six key industries, so that their ads can target the right users at Bilibili. Here are some — here are two examples. For instance, gaming, Bilibili is known for our concentration of highly-active, high-value gamers. In Q1, more than 40% of our mobile users watched game videos or live broadcasting on a daily basis. And our teams responsible for game content, game distribution and game advertising now work closely together towards shared goals, which paves the way for better-than-expected in-depth user conversion and branding outcomes.

The video views for our latest game, HonKai: Star Rail in the initial two weeks is 3.7 times that of Genshin Impact for the same timeframe. And as a result, the game distribution and ad revenue are also higher than Genshin Impact over that same timeframe in the first week. As for e-commerce, thanks to our data partnerships with Alibaba, PDD and JD, ad efficiency has improved meaningfully with Q1 revenue growing by more than 110% year-on-year during the June 18 shopping festival with a well-rounded marketing matrix, including Sparkle, branding ads, e-commerce and performance ads, we project that our revenue could potentially triple or even quadruple. And for our verticals, electronics, FMCG and auto sector, we’re confident that we’ll be able to continue with the trend of healthy growth going forward.

So, with regard to video and live broadcasting e-commerce, I think of it as incremental growth opportunities for both ad revenue and content creators’ incomes. This is the result of vibrant transactions in our community. Since last year, as all the other content platforms, we’re building closed loop ecommerce systems, we have remained committed to building an open ecosystem that is connected with all the other e-commerce sites out there. It is about shaping the users’ mindset to view Bilibili as a place for shopping and to foster their capacity for transactions here. The performance in Q1 exceeded our expectations. In Q1, there were over 10 million users placing e-commerce orders on Bilibili every day, and we also launched a dual performance product that facilitates both wish listing and transaction, which accounted for about 30% of performance ads in Q1.

E-commerce is also a new income stream for content creators. About 50,000 content creators engaged in e-commerce sales on a monthly basis in Q1, and there is now a smooth e-commerce workflow for categories such as cosmetics, food and electronics. Going forward, the momentum for consumption and transactions will get even stronger at Bilibili. So, that’s my take on how video and live broadcasting e-commerce will evolve on the platform. Next question?

Operator: Thank you. Now, we’re going to take our next question. Just give us a moment. And the next question comes from the line of Lincoln Kong from Goldman Sachs. Your line is open. Please ask your question.

Lincoln Kong: [Foreign Language] Thank you management for taking my question. So, the question is about the live streaming business. We’ve been seeing a relatively quickly growing our business for live streaming. How should we think about the future strategy and outlook, especially in terms of the integration of live streaming and on-demand as well as the overall gross margin trend for the live streaming business? Thank you.

Rui Chen: [Foreign Language] [Interpreted] We’ve always said that live streaming is a natural extension of our video ecosystem. So, operationally, we have always considered live broadcasting as the integral whole of our total operation. So, live broadcasting and videos on Bilibili sometimes often target the same demographics and there was a lot of overlap in category as well. And a lot of times, the live broadcasters are video creators. And last year — since last year we have been focusing on the fusion and integration between live broadcasting and the videos so as to empower the live broadcasting business with momentum from the video ecosystem. I think the success we have been able to achieve with live broadcasting is precisely due to the efforts we have put in to integrate video and live streaming ecosystems.

In Q1, the number of video creators who also do live streams increased by 38% and 90% of new live streamers were either average users or video creators. The video ecosystem is a source of vitality and content for our live streaming business. And in Q1, the number of active live streamers increased by 34% and the number of MPUs grew by 15%. That’s how we are empowering live streaming through our video ecosystem. So, Bilibili bodes very diversified categories of video content, and this has also contributed to the diversity of our live streaming content. One hallmark of that is our VTuber, which is — Bilibili is now home to the largest group of VTubers in China. And this is a natural extension of our ACG content from the video side. And today, VTubers are important source of income for live streaming.

The VTubers are a very active group of live streamers on Bilibili. And with the help of AIGC, I think they will be able to generate even more vivid and lively images and content for the users and the whole experience can be more interactive for the users as well. So, I’m personally very optimistic about prospects. And Bilibili also aims to be diversified and cover as many verticals as possible. And you wouldn’t believe that, but lawyers and legal matters is a very popular category on Bilibili. Some lawyers, they also double as live streamers on our platform, answering legal questions to the viewers. Sometimes they have to answer very insignificant, inconsequential, tiny questions, whatever the viewers want to ask them, and it’s also something that Bilibili offers.

Another example would be [golf] (ph). We have roughly thousands of golf players in China, and the vast majority of whom have already joined the Bilibili community as live streamers. And even though it’s a very niche hobby, they somehow ended up together on our platform. We even have a lot golf players from the province of Taiwan interacting with our users on the platform. These examples go to show that live streaming itself is very dynamic and diversified on Bilibili. It’s not just another revenue stream for us, it actually has a lot of content to offer and hold tremendous potential. And as our video business grows stronger and bigger, I believe our live streaming, live broadcasting business will also be able to expand and improve. During previous earnings calls, I’ve said that live streaming business could potentially at least double.

And I could say that again at this call, I believe live streaming has at least the potential to double at Bilibili, and the fusion between video and live streaming will continue to enhance. Theoretically, every user can be a video viewer as well as the live stream viewer and every broadcaster can generate video content as well as live streaming content. And this is now also the important income stream for creators. In Q1, 700,000 creators were able to make the income from live streaming. And fusion between videos and live streaming could also drive out our gross margin and reduce cost as more ordinary users are doing live streams on their own and the cost of bandwidth being spread out even further. We believe the gross margin for live streaming business will continue to improve.

Thank you.

Operator: Thank you. Now, we’re going to take our next question. Just give us a moment. And the next question comes from the line of Lei Zhang from Bank of America Securities. Your line is open. Please ask your question.

Lei Zhang: [Foreign Language] Thanks management for taking my question. Want to ask mainly about monetization of the content creator, which we noted that previously have some widely discussion on Internet. So can you share us more color on how we can improve either the total income or the commercial value for the content creators on Bilibili? Thank you.

Rui Chen: [Foreign Language] [Interpreted] Well, I think you’re referring to an article released in April about many — the article claims that many creators on Bilibili stopped uploading new content to the platform. I read it myself, and I think this article is nothing but misleading. And this article mentioned three content creators who paused their update — paused their video content updates. Out of millions of content creators we have on Bilibili, the article mentioned only three. And two of those three actually have released new content since then. And so, I think even though the article has a quite clickbait title, the content and the reasoning in this article was misleading. I think this article was able to start a heated debate.

It’s proof that people are paying attention to be Bilibili very closely, and some media even went down to write derivative reports on this article. And that’s why we — and that discussion ended on the hot topic list of Weibo. And internally, we have been making a lot of efforts to improve commercialization for content creators at Bilibili and we have numbers to back that up. We have done a lot of work to help our content creators monetize. In Q1 alone, 1.5 million content creators earned the income on Bilibili up by 50% year-on-year, and the amount they’re making from advertising, live streaming and also user payment has also increased meaningfully. And in this article, it has also said that Bilibili is cutting incentives for content creation, which could have some ramifications.

This is again very misleading, because the incentive programs we have is only for content creators with fewer than 10,000 followers. Basically, we provide them the subsidy to help them tide over the initial period of content creation when they did not have the ability to generate an income for themselves. And for content creators that have more than 10,000 followers, we help them find the tools to make money on their own. So, this incentive program doesn’t really matter for the vast majority of the creators on our platform. Helping our creators monetize has always been a priority in our work. We have established a Sparkle system to help content creators get commercial deals. We have also been empowering video creators to switch to live stream so that they can make an income there.

So, this effort will never stop. We’ll step up our efforts to help them make the income. That’s why — that’s because we believe only when those content creators don’t have to worry about money, they will be able to invest more energy into generating high-quality content. So, this article is able to trigger such a discussion. And it shows that users actually care a lot about the creators and the Bilibili platform. And the reason why we’re able to have such a high concentration of high-caliber creators because we believe in the value of high-quality content and power of creators. This has always been and will always be a guiding principle in our operation. We have always treated creators nicely because we understand their needs and we are going to spare no effort in supporting those creators and helping them earn an income that they deserve.

This is a work we’ll carry out continuously. Thank you.

Operator: Thank you. Now, we’re going to take our next question. Just give us a moment. And the next question comes from the line of Xueqing Zhang from CICC. Your line is open. Please ask the question.

Xueqing Zhang: [Foreign Language] Good evening, management. Thanks for taking my question. And my question is mainly about the gaming business. You mentioned in the prepared remarks that Bilibili has some [mainly] (ph) approved games. So, can management share with us the gaming pipeline and what’s [indiscernible] and outlook? Thank you.

Rui Chen: [Foreign Language] [Interpreted] This year is going to be a big year for gaming industry. Licenses for domestic games are now issued regularly every month. For imported games, two batches of licenses have been handed out since last year, which is great not just for our game distribution business, but also for advertising and live broadcasting as well. In the next several quarters, we have 13 games to be launched at home and abroad. Eight of which have acquired domestic game licenses and will be published in China. Five of them will be published overseas. We are now preparing for the launch of the high-profile game we distribute called Pretty Derby and we are now working around the clock to finish the last bit of localization work for this game before launch.

And we also have two self-developed titles: Alkaidland Records, which is the female romance game, and also Eruthyll, an ACG card game, which will be published later this summer. Bilibili is home to the largest group of ACG gamers and fans and also boast a very young user base which makes us the core channel for distributing ACG games. Since the beginning of the year, we’ve successfully distributed many ACG titles proving our worth. Once again, HonKai: Star Rail by miHoYo is a great example of that, which achieved a whopping 2.8 million first day download on Bilibili, setting a new record for our game distribution business. And just yesterday, our distribution game Reverse: 1999 was published with great initial feedback. Many people are interested in our self-developed games.

Two examples I mentioned just now are Alkaidland Records and Eruthyll, and we have more pipeline games under development. But since self-developed games, we only want to be delivering high-quality games, so the cycle will be relatively long and each game will take about three years for development, and the next self-developed game will probably be published around the year after next. We will stick to the strategy of self-developed quality games and global distribution. In terms of game genres, we will focus more on our forte such as ACG card games. Our goal is to develop top-ranking games in niche segments and manage them well over the long life cycles, and we’re putting the hard effort needed to achieve that success on this front. Thank you.

Operator: Thank you. Now, we’re going to take our last question. Please stand by. And the question comes from the line of Felix Liu from UBS. Your line is open. Please ask your question.

Felix Liu: [Foreign Language] Thank you, management, for taking my question, and congratulations on the notable improvement on GP margin and overall bottom line. Can management elaborate a little bit on measures you have taken and your drivers for future GP margin and loss narrowing drivers? Thank you.

Sam Fan: This is Sam. I will take your question. Our focus of this year is very clear, to improve the gross margin, in the same time we will reduce our net loss. So in the first quarter, our gross profit year-over-year growth grew about 37% and net loss narrowed considerably about 72% year-on-year and 58% quarter-over-quarter. From the revenue side, we continue to improve the quality of the revenue. The advertising business, as we mentioned, grew by 22% year-over-year, so it’s a high margin business. And at the cost end, we still improved our operational efficiency and achieved a year-on–year decrease of 7% of total cost. And so that results the GP increase by 37% and the GP margin improved to 22% compared with 16% last year.

So, use the technology upgrading and to operational management, the bandwidth cost, for example, continued to decline, down about 16% year-on-year and 12% quarter-over-quarter. And the other fixed cost, for example, label and other operational cost also fell about [7%] (ph) year-on-year — quarter-over-quarter. So from the expense side, you already saw the overall operating expenses decreased significantly, about 11% year-over-year and DAU increased by 18% year-on-year. So, we will keep actively control our operating expenses, especially the marketing expenses, which are already down about 30% year-on-year in Q1. I think that will be — that trend will continue in the following quarter. So, we are quite confident that we’ve controlled the cost and expense.

Our gross profit margin will improve quarter-over-quarter, mainly of this year. And the operating expenses will also show a meaningful year-on-year decline and to achieve a further narrowing of our net loss. Thank you.

Operator: Thank you. And that concludes the question-and-answer session. Thank you, once again, for joining Bilibili’s first quarter 2023 financial results and business update conference call today. If you have any further questions, please contact Juliet Yang, Bilibili’s Executive IR Director or Piacente Financial Communications. Contact information for IR in both China and the U.S. can be found on today’s press release. Have a great day.