Bilibili Inc. (NASDAQ:BILI) Q3 2023 Earnings Call Transcript

Bilibili Inc. (NASDAQ:BILI) Q3 2023 Earnings Call Transcript November 29, 2023

Bilibili Inc. misses on earnings expectations. Reported EPS is $-2.12 EPS, expectations were $-0.24.

Operator: Good day, and welcome to the Bilibili Third Quarter 2023 Financial Results and Business Update Conference Call. Today’s conference call is being recorded. At this time, I would like to turn the conference over to Juliet Yang, Executive Director of Investor Relations. Thank you. Please go ahead.

Juliet Yang: Thank you, operator. During this call, we’ll discuss business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially from those mentioned in today’s news release and in this discussion due to a number of risks and uncertainties, including those mentioned in our most recent filings with 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 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: Thank you, Juliet, and thank you, everyone for participating in our 2023 third quarter conference call to discuss our financial and operating results. I’m pleased to deliver today’s opening remarks on behalf of Mr. Chen. The record high committed growth we achieved in the third quarter is a testament to the power of our self-driven content ecosystem. This continuity drawing in more users and keeping them highly engaged. Notably, our DAUs increased by 14% year-over-year, surpassing the 100 million milestone and landing at 103 million in the third quarter. MAUs also grew to a record high of 341 million, and the DAU to MAU ratio in this quarter improved to 13.2%. Meanwhile, our user daily time spend also reached a historical high of 100 minutes with total user time spend increasing by 19% year-over-year.

We are encouraged by the strong user growth momentum and the direct correlation with our monetization efforts, improving margins, narrowing losses and maintaining growth has been our key objective this year. In the third quarter, we leveraged our expanding traffic more efficiently, integrating commercializations in near rails and products in our content ecosystem to drive quality to apply growth. This is evident in our advertising and VAS business, which grew by 21% and 70% year-over-year, respectively. Furthermore, our gross profit increased by 38% year-over-year, and our gross profit margin rose to 25%, up from 18% in the same period last year, marking the fifth consecutive quarter of gross margin improvement. Our target expense control measures reduced our total operating expenses by 12%, including a 19% decrease in sales and marketing expenses, and 8% decrease in G&A expenses and a 6% decrease in R&D expenses on a year-over-year basis.

As a result, our adjusted operating loss and adjusted net loss both narrowed by 51% year-over-year in the third quarter. Notably, we achieved an important milestone of generating positive operating cash flow in the third quarter, demonstrating our business operations have entered a positive cycle and marking step forward in our profitability goals. 2023 has been a year with continued changes across industries and markets. To adapt to the new paradigm, we are increasing our focus on our core business. Trading expenses in areas yielded lower returns. In the fourth quarter, we have further streamlined our organization and expect our total headcount to be around 9,000 by end of 2023 compared with 11,000 at the end of 2022. Additionally, future project plans will continue to be ROI focused.

With these measures, we will become limber as the organization to better align ourselves with the new environment putting the state of Bilibili’s long-term success. With that overview, let’s look at our core pillars of content, community and commercialization in more detail. Beginning with content and community. The key metrics that represent the quality of our community continued to rise. The number of daily active content creators on our platform increased by 21% in the third quarter. And the monthly new content submissions were 21 million, up 37%, both year-over-year. More content creators and more wider fan base during the third quarter. The number of content creators with over 10,000 followers grew by 36% year-over-year. Total daily video views increased by 26% year-over-year to 4.7 billion among, which story mode video views grew by 45% year-over-year.

As I mentioned, users are spending more time with us than ever before with user daily time spend reaching an all-time high of 100 minutes. Meanwhile, monthly interactions among our users also increased by 18% year-over-year, reaching 17 billion. By the end of the third quarter, we had 224 million office members who have taken and passed our community event, a 23% increase year-over-year. At end of 12-month retention rate remained strong at around 80%. Our content categories continue to expand, attracting more users and bringing new commercial opportunities for both content creators and the platform. Inevitably, our users and content creators entered new life stages and new categories in merge, such as home decoration, relationships, well-being maturity [ph] and automotive.

For example, new content submissions in home decoration and appearance genre grew by nearly 19% year-over-year in the third quarter. In parallel, content creators in this category and their earnings, as well as advertising revenues generated from the same category, have all been fully improved. Meanwhile, we have created more direct monetization opportunities for our content creators, a total of 1.68 million content creators, generated income on Bilibili in the third quarter, up 34% from the same period last year. The adoption of video and live e-commerce has also brought additional channels for more creators to realize their commercial value. The number of content creators who earn money through video and live commerce in the third quarter grew by over 160% year-over-year.

Additionally, this summer, our two signature offline events, Bilibili World and Bilibili Macro Link, attracted a gathering of over 200,000 young people in Shanghai to experience our unique community culture. The remarkable attendance underscores Bilibili’s influence among the young generation and brought us more brand advertisers with incremental budget allocation. Lastly, I’d like to talk about commercialization. Total revenue for the third quarter was RMB5.8 billion, flat year-over-year. Advertising revenues and VAS revenues increased by 21% and 17% year-over-year, while offset by 33% year-over-year decrease in game revenues. We are encouraged by the progress in our ads and VAS business, where the revenue growth potential has a direct correlation with DAU growth.

Meanwhile, we have taken a closure look at our game business and made certain adjustments to better align ourselves with the new industry landscape. Looking at this in more detail. Our growing and engaging community is the foundation of commercialization. As people spend more time and engage in more activities, they are more willing to pay for Bilibili content and services. Looking at our VAS business. VAS revenue for the period increased by 17% year-over-year to RMB2.6 billion, mainly led by our live broadcasting business. The ongoing interaction of live broadcasting into our video universe continues to yield results. More content creators are stepping into live broadcasting as host, further enriching our live broadcasting offerings and enabling them to earn income.

By the end of September, our premium members grew to 21.1 million with over 18% on annual subscription or auto renewal packages, underscoring the trust and the loyalty we have built with our brand. In the third quarter, we launched the highly anticipated self-produced anime, Link Click Season 2 [Foreign Language], which was well received by many new and old fans. In September, we announced 68 new Chinese anime titles at our six made by Bilibili Chinese anime press event. Both of these titles will be released in the next few years, ensuring a continued strength of the loved content of our premium members. Turning to our advertising business. As we further integrate sales conversion tools within our ad products across scenarios, we are now more effectively converting our high-quality traffic into substantial ad revenue growth.

In the third quarter, total advertising revenues grew by 21% year-over-year, reaching RMB 1.6 billion, mainly led by performance-based ads, which grew by over 40% year-over-year. Notably, our strong added revenue growth contributed to meaningful gross profit growth with higher revenue contribution from our performance-based ads. For the third quarter, our top five asset verticals were games, digital products and home appliance, e-commerce, food and beverage and automotive. Despite the third quarter traditionally being an off-peak season for e-commerce advertising, our strengthened advertising solutions enabled us to secure a greater share of advertising budgets in this competitive industry. During the Double 11 shopping festival in the fourth quarter, we further strengthened our data collaboration with e-commerce platforms and upgrading our video and live commerce and products.

The total GMV from our videos and live commerce products increased by over 250% year-over-year for the Double 11 shopping season. Turning to our game business. Total revenues was RMB 992 million, representing an increase of 11% quarter-over-quarter and a decrease of 33% year-over-year. The reason for the year-over-year decrease was due to a high base from the 2022 summer release of Space Hunter 3, as well as weaker-than-expected new game performance in the third quarter this year. Our legacy games, Azur Lane and FGO, remained stable during the period. On August 30, 2023, we launched our exclusive licensed ACG titled Pretty Derby. On September 8, 2023, the game was temporarily removed from the App Store for content refinement, and we are working diligently to resume download access as soon as possible.

The game industry has changed dramatically in the past two years. At the beginning of the fourth quarter, we closely reviewed our in-house game development projects. We further streamlined our in-house development team and discontinued projects that did not meet our standards. Consolidating these operations will help reduce our future R&D expenses. And that said, as a video community for the young generation, we process natural advantages in the game industry. We aim to further leverage our growing advertising capabilities to strengthen our game distribution power as well as selectively invest in our in-house development to bring high-quality games to our users and create value or our business partners. In summary, we are dedicated to reach our financial goal of gross profit improvement and a loss reduction this year.

We have delivered on this goal with a 38% increase in gross profit and a 51% reduction of both adjusted operating loss and adjusted net loss in the third quarter, and we will continue on this path. At the same time, we strongly believe in the power of good content and community. 100 million DAU is just another beginning for us to build up. We will stay true for our mission and continue to enrich the average life of the young generation in China. This concludes Mr. Chen’s remarks. I will now provide a brief overview of our financial results for the third quarter of 2023. As mentioned in Mr. Chen’s remarks, our financial profile has significantly improved. We continue to gain operating leverage, while building our community and video ecosystem.

We have increased our gross profit margin and narrowed our adjusted net loss for five consecutive quarters. Total net revenues for the third quarter were RMB 5.8 billion, on par with the same period last year. Our total net revenues breaking down by revenue stream were approximately 45% VAS, 28% advertising, 17% mobile games and 10% from our IP directives and other business. Our cost of revenues decreased by 8% year-over-year to by RMB 4.4 billion, driving our gross profit to RMB 1.5 billion, up 38% year-over-year. Our gross profit margin reached 25%, up from 18% in the same period last year. We expect our gross profit margin to continue to improve in the fourth quarter. Our total operating expenses were down 12% year-over-year to RMB 2.6 billion.

In the third quarter, we cut our sales and marketing expenses by 19% year-over-year to RMB 992 million, while our DAUs reached a record high. Sales and marketing expenses were 70% of total revenue compared with 31% in the same period last year. G&A expenses were RMB 499 million, down 8% year-over-year. R&D expenses was RMB 1.1 billion, down 6% year-over-year. As a result, we narrowed our adjusted operating loss and adjusted net loss both by 51% year-over-year in the third quarter. Our adjusted net loss ratio in the third quarter was 15%, improving from 30% for the same period a year ago. Notably, we generated positive operating cash flow in the third quarter, demonstrating our business operation has entered into a positive cycle. As of September 30, 2023, we had cash and cash equivalents, time deposits and short-term investments of RMB 14.5 billion or US$2.0 billion.

In the third quarter, we repurchased an aggregate principal amount of US$14.5 million December 2026 notes with an aggregate cash consideration of US$13 million. As of September 30, 2023, the aggregate outstanding principal month of April 2026 notes, 2027 notes and the December 2026 notes was US$862 million. We believe our cash position is sufficient to cover all of our remaining convertible bonds, due to lower than expected GAAP revenues. We now expect our 2023 full year revenues to be at the lower end of RMB 22.5 billion to RMB 23.5 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: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Zhang Xueqing from CICC. Please go ahead.

Zhang Xueqing: [Foreign Language] Good evening management. Thanks for taking my question and congrats on the third quarter. My question is about user growth. As the deals passed the milestone of 100 million for the first time in the third quarter and user time span reached a historical high as well. So what’s your views on user growth potential? And recently, media reported that the company has internally proposed a goal of doubling DAU. So can management share the path and timetable for achieving this goal? Does it require increased expense in user acquisition? And thank you.

Rui Chen : [Foreign Language] I think in the big movement of the utilization is a very natural process for a good video product to grow bigger and bigger by itself that’s why when we are talking about user growth strategy internally, we’ve been emphasizing on improving the content quality, improving the user experience, not mainly through the user acquisition. That’s why starting from second quarter of last year, we have been emphasizing on the ROI of our user acquisition strategy. As we are spending less in sales and marketing, we are actually growing more and more DAUs. That is why we have been focusing on improving the operating efficiency, improving our product capability and pursue simultaneous commercialization as well as the user growth virtuous cycle.

In the third quarter, our DAU has surpassed 100 million milestone. We’ve also reached a record high of MAU numbers. And this is a strong evidence that we have succeeded in our user growth strategy in the past year, and this is just a new beginning for us. The reason why we have been focusing on user growth is, I think for all the Internet product, the user base will be one of the key competitive strengths. The larger user base we get, the more content creator as well as the commercialization will come with it. And for Internet product, user base is also the foundation for our commercialization. As you can see from Bilibili’s commercialization model, advertising and live broadcasting has — its revenue growth has direct correlation with DAU growth.

In the third quarter, our ad revenue and VAS revenue grew by 21% and 17%, respectively, year-on-year. And as you can see, we have already come to a strategy or form a virtual cycle between our traffic growth. And our revenue growth in advertising and the VAS, specifically live broadcasting. At the same time, the revenue that grew from these two sectors has also converted to a certain part of that also converted to our content creator’s income and also will generate more content creation on a platform. So from a content ecosystem perspective, it has also been very positive to our overall content ecosystem. At this point, we still see great growth potential for our user scale. When I do the user research, I discover attach for Bilibili users, there is a great word of mouth effect.

People feel good about the product, who will naturally spread words and introduce new users. And if you look at the past year’s data, not only we have achieved very strong user growth, we have also exceeded in many metrics in terms of community growth, video views and content creators numbers. That means that we have achieved a virtuous cycle in between the content user as well as the community. I believe of our content ecosystem continues to prosper. Bilibili should be able to attract more and more users, because we think it’s a very natural desire for all human beings to find good content and find brands who share the same interest. Going forward, we will still largely rely on the product improvement, content expansion to drive our user growth and pair with ROI focused sales marketing and only invest in user acquisition when the ROI makes sense.

That means only to acquire users who are making money by investing in the user acquisition strategy. That is a mid to long-term user growth strategy for us.

Rui Chen: [Foreign Language] End of last year, I have raised the three key objectives for the company, which is in margin improvement loss narrowing and maintain growth. We want to achieve this target at the same time, not by sacrificing the first two targets to achieve the last one. That’s all. Thank you.

Juliet Yang: Operator, next question, please?

Operator: One moment for the next question. Next question comes from the line of Fang Wei from Mizuho. Please go ahead.

Fang Wei: [Foreign Language] So can management help elaborate on the key drivers for the ad business, especially, ERS in the quarter? And how the performance during the Double 11 promotional campaign? In addition, can you update us on your progress on live streaming e-commerce and short video e-commerce? And lastly, how should we expect segment growth for 2024? Thanks.

Rui Chen: In the third quarter, our advertising revenue grew by 21% year-over-year. Ad revenue as percentage of total revenue has grown from 23% in the same period last year to 28% in the third quarter of this year. And also, it has drove the gross margin — gross profit improvement on the company level. So we’ve introduced our key strategy and the driving force of our ad business in the past two quarters comprehensively, which has been the one horizontal industry solutions as well as the middle platform power improvement. From an industry vertical perspective, game and e-commerce has been very strong despite Q3 being a traditional full season, ad revenue from e-commerce still grew by 90% year-on-year. Additionally, we have been actively exploring other integrated solutions with other industries.