Bilibili Inc. (NASDAQ:BILI) Q3 2022 Earnings Call Transcript

Bilibili Inc. (NASDAQ:BILI) Q3 2022 Earnings Call Transcript November 29, 2022

Bilibili Inc. beats earnings expectations. Reported EPS is $-4.46, expectations were $-4.69.

Operator: 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.

Juliet Yang: Thank you, operator. During this call, we will 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 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 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.

Sam Fan: Thank you, Juliet and thank you, everyone for participating in our third quarter 2022 results conference call. I am 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 is all over the industry. To cope with the challenging environment, we have reprioritized our goals and promoted to focus on two key topics that will help us turn the corner.

First, our users and our MAUs have reached a sizable base of nearly 333 million. We think that it’s 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 inferential power as a platform, as well as various commercial prospects, 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 RMB5.8 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 are narrowed by 10 percentage points compared with the prior quarter. Looking ahead, we will implement a number of additional cost potential measures and further rationalize our marketing expenses and headcount planning. Specifically, we are streamlining our investment in R&D and cutting down on 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, the young generations on Bilibili grow up and enter into new stages of life, their interest involved, driving greater 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 content creators continuing to offer more creators, more opportunities to make money while doing things they love. In the third quarter, over 1.2 million content creators under 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 RMB2.2 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 enemy 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 RMB1.4 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 part of ads offerings continue to capture more performance-based ad dollars in the third quarter.

Our top advertising verticals in the third quarter was against 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 RMB1.5 billion, largely driven by the new titles we launched in the domestic and overseas market in the third quarter. Develop in-house, 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 two games approved for domestic release this year and earlier next year, including 1 self-development title. 5 titles are slated to launch in the overseas markets early next year.

Facing the market’s 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 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 quarter were RMB5.8 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 RMB4.7 billion. Our gross profit in the third quarter was RMB1.1 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 RMB2.9 billion, flattish compared with the same period of 2021. We cut sales and marketing expenses by 25% year-over-year to RMB1.2 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 RMB543.4 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 RMB1.1 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 RMB1.7 billion and RMB1.8 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 three outstanding convertible bonds totaling $2.5 billion, among which the full price of $746 million is accessible in June 2023, $429 million is accessible in April 2024 and $1.3 billion is accessible in December 2024.

As of September 30, 2022, we had cash and cash equivalents, term deposits and the short-term investments of RMB23.9 billion or $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 we 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 $329 million of these notes for a total cash consideration of $247 million, generating $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 becomes effective on October 3, 2022. Bilibili is now a new private listed company in Hong Kong and the United States. This conversation will further expand our investor base and provide more liquidity for our securities in the capital markets. With that in mind, we are currently producing net revenues for the fourth quarter of 2022 to be between RMB6.0 billion and RMB6.2 billion. 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: Thank you. Your first question is from the line of Daniel Chen from JPMorgan. Please go ahead.

Daniel Chen: 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? Thank you.

Rui Chen: And 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. Well, if we are able to grow 3x in the past few years, which supported the thesis that the Bilibili’s 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 growth. 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.

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 linked to the commercial perspective of our community. 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 over MAU roll directly linked 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-MAU ratio, it has already improved from 26% in 2021 to 27% in 2022. 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 marketing expenses and to achieve breakeven often as possible. 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%. 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.

Operator, next question, please. Thank you.

Operator: Thank you. We will now take our next question. This is from the line of Lei Zhang from Bank of America. Please go ahead.

Lei Zhang: Thanks, management for taking our question. 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 for the room to control and also any change to our breakeven target? Thank you.