Bilibili Inc. (NASDAQ:BILI) Q2 2023 Earnings Call Transcript

Bilibili Inc. (NASDAQ:BILI) Q2 2023 Earnings Call Transcript August 17, 2023

Bilibili Inc. misses on earnings expectations. Reported EPS is $-2.33 EPS, expectations were $0.41.

Operator: Good day, and welcome to Bilibili Second 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 filings with the SEC and the Hong Kong Stock Exchange. The non-GAAP financial measures we provide are for comparison purposes only. Definitions 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 Lee, 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 second quarter conference call to discuss our financial and operating results. I’m pleased to deliver today’s opening remarks on behalf of Mr. Chen. We set our sights on prioritizing profitability and DAU growth, and we have made solid steps toward these goals. In the second quarter, we meaningfully improved our gross profit and narrowed our losses, while continuing to deliver healthy DAU growth and the strong community metrics. I will share more color on both fronts. First of all, on our path to profitability. In the second quarter, we further improved our commercialization efficiency, enabling us to convert our growing traffic to quality top-line growth.

The momentum we see in our advertising and live broadcasting business is encouraging. In the second quarter, our ad revenues increased by 36% and live broadcasting revenues increased by 32% both year-over-year. Moreover, our gross profit increased significantly by 66% year-over-year, driving our gross profit margin to 23%, marking the fourth consecutive quarter of improvement. Meanwhile, we have continued to strengthen our expense controls. Our total operating expenses declined by 14%, including a 22% decrease in sales and marketing expenses, a 14% decrease in G&A expenses, and 7% decrease in R&D expenses, all on a year-over-year basis. These margin enhancements and our effective cost management contributed to our bottom-line improvement. We meaningfully reduced our non-GAAP net loss by 51% year-over-year.

Moving on to our community growth. Our DAUs increased by 15% year-over-year to 96.5 million in the second quarter, driving our DAU to MAU ratio up to 29.8%. Meanwhile, the users’ average daily time spent on our platform reached 94 minutes in the second quarter, driving total time spent up by 22% year-on-year. We are pleased to see this strong DAU growth has continued in Q3. As we move into the second half of this year, our main tasks will be in three core areas: First, we aim to further enhance our traffic commercialization efficiency by increasing our ad revenues and the live broadcasting revenues. Additionally, we will bring more high-quality games to our users, including the highly anticipated game, Pretty Derby. Secondly, we will continue to take a prudent financial approach with strict control of our costs and expenses and further narrow our losses.

Finally, yet importantly, we are committed to achieving ongoing DAU growth and fostering an inspiring video community for young generations in China. With that overview of our progress, I’d now like to provide a brief update on our three core pillars of content, community and commercialization. Starting with content. Content creators continue to be our ecosystem’s most valuable asset. Supporting these talented content creators in their ability to amass large followings and to be able to earn more money are among our top tasks. As always, we continued to optimize our algorithms and products to facilitate high-quality content and enable creators to be recognized. In the second quarter, the number of daily active content creators on our platform and our monthly content submissions increased by 19% and 43% year-over-year, respectively.

In the second half of this year, we plan to shift our video watching metric from video views to video time spent, which will help our users discover more high-quality content on Bilibili. We are also beta testing an AI-powered search feature in our community that enables relevant videos to be found more easily. Creator monetization on Bilibili increased as well in the second quarter. Over 1.58 million creators earned money through various Bilibili channels, showing a 40% increase year-over-year. In addition to our cash incentive program, more creators are earning income through advertising and live broadcasting channels. For example, our video commerce ads have opened up new efficient earning opportunities for content creators. In the second quarter, the number of creators who earned money through video commerce grew by over 220% year-over-year.

Resonant content and multi-scenario products, like Story Mode, continue to drive platform traction. In the second quarter, our total daily video views were up 31% year-over-year to 4.1 billion; among which, Story Mode’s daily video views grew by 76% year-over-year. It has become one of the key video consumption scenarios for our users, contributing to our growth in DAUs and ad revenues. Turning to our community. Our users remain highly engaged and sticky. The users’ average daily time spent on our platform was 94 minutes in the second quarter, reaching the highest second quarter level in our company’s history. Their monthly interactions reached nearly 15 billion in the second quarter, up 19% year-over-year. Our core group of official members also increased by 26% year-over-year to 214 million, with a solid 12-months retention rate of around 80%.

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Our signature offline events also bring our community together in-person. This July, we hosted two exciting offline events, Bilibili World and Bilibili Macro Link in Shanghai. Over 200,000 tickets sold out almost immediately. The tremendous response highlights Bilibili’s strong influence among young generations, as well as users’ willingness to pay for our unique community experiences. Finally, let’s look at our commercialization and financial progress. Total revenues for the second quarter increased by 8% year-over-year to RMB5.3 billion. Specifically, revenues from our advertising and live broadcasting businesses increased by 36% and 32% year-over-year, respectively. Meanwhile, we continued to improve our gross profit and margin. Our gross profit in the second quarter grew by a notable 66% year-over-year, driving our gross profit margin up to 23% from 15% in the same period last year.

Looking at this in more detail, Revenues from our value-added services business grew 9% year-over-year to RMB2.3 billion in the second quarter, primarily driven by increased revenues from our live broadcasting business, which grew by 32% year-over-year. As we further integrate live broadcasting within our video operations, we have opened up multiple opportunities to expand and diversify our live broadcasting content by converting content creators into live broadcasting hosts. In the second quarter, the number of monthly active live broadcasting hosts increased by 15% year-over-year. In addition, we are exploring new live broadcasting products to create more paying channels for our users, including live celebration events. We expect our ongoing integration activities to support our revenue growth in the second half of 2023.

By the end of June, we had 20.5 million premium members. Over 80% of whom are on an annual subscription or auto renew package, highlighting our trust-based user relationships. In Q3, we released several highly anticipated Chinese anime titles, including Fog Hill of Five Elements [Foreign Language] and our self-produced title Link Click Season 2 [Foreign Language] to bring more exclusive high-quality content to our premium members. Turning to our advertising business. As we progress our initiative to integrate sales conversion with ad products, we believe we have found an effective way to convert our high-quality traffic to advertising revenue growth. For the second quarter, our advertising revenues grew 36% year-over-year to RMB1.6 billion, mainly led by our performance-based ad revenues growth, which increased by over 60% year-over-year.

Ad revenues from our brand and Sparkle offerings also grew by a double-digit percentage year-over-year. Our top five advertising verticals in the second quarter were games, e-commerce, digital products and home appliances, skincare and cosmetics, and food and beverage. Our continuous improvements to our integrated industry ad solutions have also helped us gain more ad budget spend from industries, such as games and e-commerce. Specifically by introducing video commerce products, ad revenues from the e-commerce industry increased by 144% year-over-year in the second quarter. Meanwhile, content creators were able to benefit from more ad opportunities. The number of creators who earned income through video commerce grew over 220% year-over-year.

Moving forward, we will continue to build our commercial database, refine our algorithms, as well as optimize our ad product offerings. We are confident that we can improve our ad revenues per DAU and achieve solid growth in the second half of 2023. As for our games business, our revenues were RMB891 million for the second quarter, a 15% decline from the same period last year. The year-on-year decline was mainly due to a lack of new game launches in the second quarter and a grossing decline for certain titles. Our top two performing games, Azur Lane and FGO remained stable. Particularly during Azur Lane’s six year anniversary, the game reached a new peak in paying users and revenues. In addition, we have also successfully extended our exclusive license of Azur Lane for another five years.

In July, we launched our first self-developed game in the female romance genre, Alkaidland Records, [Foreign Language]. Welcomed by a host of female users, the game ranked number one on the iOS free download chart shortly after its release. We are actively working on developing more games that users love. In the meantime, we have seven new titles that we plan to release in domestic and overseas markets in the second half of the year, including the highly anticipated game Pretty Derby, [Foreign Language]. Pretty Derby is scheduled to launch on August 30 and is now available for pre-registration. Over 2 million players have already pre-registered as of today. Given said that, the launch of Pretty Derby as well as few self-developed titles were delayed by several months than we initially planned.

Due to lower revenue contribution from games and other non-core businesses, such as IP derivatives and others, we now expect the full year 2023 revenue to be between RMB22.5 billion and RMB23.5 billion. As I mentioned earlier, our key financial goal for this year is to improve our gross profit and narrow losses. We have delivered on this goal with 66% increase in gross profit and 51% cut on adjusted net loss in the second quarter. Look ahead, we are committed to further improve our gross profit and control our expenses, and meaningfully cut down losses in the second half of this year, and reach our breakeven target by 2024. As we progress on achieving our financial target, we will continue to lead the healthy growth across our platform and enrich the everyday life of young generation in China.

This concludes Mr. Chen’s remarks.

Sam Fan: I will now provide a brief overview of our financial results for the second quarter of 2023. As mentioned in Mr. Chen’s remarks, our financials continue to improve. We are improving our margins and showing clear results in our bottom-line with narrowed losses. Total net revenues for the second quarter were RMB5.3 billion, up 8% compared with the same period last year. Our total net revenues breakdown by revenue stream was approximately 43% VAS; 30% advertising; 17% mobile games; and 10% from our IP derivatives and other businesses. Our cost of revenues decreased by 2% year-over-year to RMB4.1 billion, driving our gross profit to RMB1.2 billion, up 66% year-over-year. Our gross margin was 23%, up from 15% in the same period last year.

We expect gross margin to continue to improve throughout the back half of the year. Our total operating expenses were down 14% year-over-year to RMB2.5 billion. Tight control of our expenses is ongoing while we improve our monetization at the same time. We cut sales and marketing expenses by 22% year-over-year to RMB918 million, while our DAUs grew by 15%. As a percent of total revenues, sales and marketing was 17%, compared with 24% in the same period last year. G&A expenses were RMB539.7 million, down 14% year-over-year. R&D expenses were RMB1 billion, down 7% year-over-year. Our net loss and adjusted net loss were RMB1.5 billion and RMB964.1 million, respectively, narrowing by 23% and 51%, year-over-year, respectively. Our adjusted net loss ratio in the second quarter was 18%, improving from 40% for the same period a year ago.

Turning to our capital allocation and liabilities management. In June 2023, we completed the repurchase right offer for our 2027 notes with a total principal amount of US$746 million. As of the end of the second quarter, our outstanding convertible bonds totaled a principal amount of US$876 million. As of June 30, 2023, we had cash and cash equivalents, time deposits and short-term investments of RMB14.3 billion, or US$2 billion. We believe this amount is sufficient to cover all of our remaining convertible bonds and fund our future operations. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

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Q&A Session

Operator: Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions] We are now taking the first question. And the first question is from Xueqing Zhang from CICC. Please go ahead. Your line is open.

Xueqing Zhang: [Foreign Language] Good evening, management. Thanks for taking my question, and congrats on advertising towards profitability. My question is about user engagement. DAU further increased in the second quarter. So, what’s the DAU trend going forward? And can management share more details on the user engagement during the recent summer holiday? Thank you.

Rui Chen: [Foreign Language] [Interpreted] Since last year, I have been emphasizing increasing our earning power and achieve healthy and sustainable DAU growth are the top two priorities of our company, and we have been executing on that strategy. In the second quarter, with sales and marketing down 22% year-on-year, we have grown our DAU by 15%, reaching 96.5 million. And our daily time spent — daily user time spent reached 96 — 94 minutes. This is the record high of same period in our operating history. And our overall time spent of the entire community grew by 22% year-over-year. All of above metrics shows a very healthy and robust growth of the community. The reason why we have been emphasizing on the healthy growth of our DAU is because we believe the healthy growth of DAU is the foundation and preliminary requirement for Bilibili to achieve sustainable profit.

And we believe we have already discovered an effective way to convert our high-quality traffic into increasing top-line through advertising and live broadcasting. And we believe with this effective route and methods, we can achieve DAU and top-line growth and this will be a virtuous cycle. In the second quarter, our ad revenue and live broadcasting revenue achieved 36% and 32% year-on-year growth, respectively, which exceeded the industry average growth a lot. As for the outlook into the summer, given that we’re in August in the period of the summer vacation, we have been witnessing and experiencing a strong DAU and daily user time spent growth. We do expect that in the third quarter, our DAU can surpass a very exciting milestone of 100 million, and we also expect our average daily time spend can reach a new historical high.

We are very confident with tight control on sales and marketing expense, we can continue to attract our users with high-quality content and retain our user with our engaging community and achieve DAU sustainable and healthy growth. And we also believe this high traffic can be effectively converted to our sustainable top-line growth.

Juliet Yang: Next question, please. Thank you.

Operator: Thank you for the question. We are now taking the next question. Please standby. And the next question is from Lei Zhang from Bank of America Securities. Please go ahead. Your line is open.

Lei Zhang: [Foreign Language] Thank you management for taking my question, and congrats on solid advertising growth. My question also related to ad business. Can you share with us the major driver of the ad business, follow the strong base of second quarter? Also, can you give us some updates on the June 18 promotion at — growth on our platform? In addition, how should we look at the second half ad growth on Bilibili? And how should we think about the new business, e-commerce streaming development to our ad business? Thank you.

Carly Lee: [Foreign Language] [Interpreted] In the second quarter, our ad revenue grew by 36% year-on-year. And overall, for the first half of this year, our ad gross rate has exceeded the industry average. At the same time, if you look at the ad revenue per — ad revenue as percentage of a total revenue, it has increased from 25% same period last year to 30% in the second quarter, which directly lead the growth of our gross profit. The one horizontal one vertical strategy we mentioned last quarter is beginning to pay off, and that’s been driving our advertising revenue growth. The one horizontal, actually referring to the technology middle platform and the data capability, includes optimizing the recommendation model, improving the advertising inventory and matching efficiency and the application of AIGC to improve overall ad efficiency.