Bilibili: We will not easily give up on live broadcasting and will stay true to gaming as our main business. (3Q22 Earnings Call Summary)

The following is $Barnes.USilibili.US 22Q3 Conference Call Summary and Financial Report Review, link to the article "B Station approaching a turning point, needs radical solutions to break doubts""

Management Commentary

1. Healthy community growth in Q3 2022-

DAU exceeded 90 million and MAU exceeded 330 million YOY growth of nearly 25% each;

In Q3, users spent an average of 96 minutes on the platform every day, which is an increase of 8 minutes from the same period last year. Total time spent by users on Bilibili has increased by 37% YOY.

2. Two critical tasks that helped turn things around for us-

First, our user strategy. With our MAU having already reached the huge base of 330 million, we believe it's time to shift our main focus to increasing DAU. DAU not only represents the quality and sustainability of our community, but also directly correlates with our platform's influence and various business prospects, especially in terms of revenue generated by our advertising and VAS businesses. By improving our products and algorithms, we can continue to grow our DAU base and increase our DAU-to-MAU ratio by reducing sales and marketing expenses.

Secondly, we are committed to improving our financial situation by expanding gross margins and reducing losses. After a challenging first half of the year, Q3 revenue grew to RMB 5.8 billion, an 11% YOY increase.

In Q3, we continued to take various measures to tighten our expenses. Gross margin in Q3 increased to 18%, an increase of 3% QOQ. Sales and marketing costs as a percentage of total revenue decreased by 3% QOQ to 21%. Our non-GAAP net loss rate also narrowed by 10 percentage points from the previous quarter.

Looking to the future, we will implement additional cost control measures and further rationalize our marketing expenses and employee headcount plans. Specifically, we are streamlining our investment in R&D, reducing projects with low chances of success, and being especially cautious when exploring new opportunities. At the same time, we are focusing our resources on areas that are related to improving commercial efficiency and user experience. These adjustments will be completed by the end of this year. As a result, we expect our R&D spend to peak this year and start to decline in 2023, and our net loss will narrow further accordingly.

3. By business segment-

In terms of content, we see that the younger generation is still enthusiastic about the Bilibili platform. In addition to our traditionally strong vertical content, we also see emerging popular categories such as automobiles, home decoration and interior design, and maternal and child care. In Q3, Bilibili's 3.8 million monthly active UPs created nearly 16 million new videos every month, an increase of 40% and 54%, respectively, YOY. The continuously expanding content library has driven the overall traffic growth on our platform. With the promotion of PUGV and Storymode content, total video views increased by 64% YoY, with PUGV and Storymode views increasing by more than 34% and 470% YoY respectively. With our enhanced content distribution capabilities, we are better equipped to build strong fan bases, allowing us to integrate and offer users easier access to a wider range of content. Our impressive base of paying users and the continuous provision of rich content from UP mains provide a strong foundation for further development.

We continue to cultivate profitable avenues for content creators to provide them with the opportunity to do what they love while earning income. In Q3 2021 alone, over 1.2 million content creators earned income through various channels on Bilibili, a YoY increase of 74%.

Through our unique and diverse content, we continue to deepen user engagement in our community. As mentioned earlier, the average daily usage time reached a record high of 96 minutes, an increase of 8 minutes YoY. Our monthly interactive activities also increased by 41% YoY, reaching 14.4 billion times. In addition, the number of official members on our website increased by 37% YoY to reach 183 million, with a retention rate of over 80% for 12 months.

In terms of VAS business, our value-added service revenue was RMB 2.2 billion, a YoY increase of 16% in Q3 2021. By integrating our live broadcasting platform with our PUGV ecosystem, we maintain our unique platform advantages.

In Q3 2021, the number of live broadcasting programs increased by 57% YoY.

The total number of paying users for live broadcasting programs increased by 79% YoY in Q3 2021.

The number of VIP members increased by 12% YoY in Q3, reaching 20.4 million. In December of this year, we plan to release our own animated series "The Three-Body Problem", a highly anticipated production expected to attract a wide range of science fiction enthusiasts to our platform.

In terms of advertising business, despite the weak macro environment, net revenue was RMB 1.4 billion, a YoY increase of 16%. By combining different advertising products and conversion modules in different video viewing scenarios, we have further strengthened our integrated marketing products. As part of our advertising product, StoryMode advertising continued to generate more ad revenue in Q3. Our top vertical markets for advertising in Q3 were gaming, digital products, home appliances, skincare and cosmetics, automotive, and food and beverages.

In terms of gaming business, our gaming revenue increased by 6% YoY to reach RMB 1.5 billion, mainly due to the launch of new games in domestic and overseas markets in Q3. "Internal development, global distribution" remains our core gaming strategy, and has begun to yield results. Our revenue from self-developed games accounted for 9% of our total game revenue in Q3. We have two games approved for release domestically in China this year and early next year, including one self-developed game. We have a very solid game strategy and distribution channels and we expect to release five games in overseas markets early next year.

In the face of macroeconomic uncertainties in the market, our main goal is clear: to increase gross profit margin and reduce net losses. Although we are still committed to achieving our non-GAAP breakeven target by 2024, we will also actively manage our cash situation and liabilities. We believe that we can withstand macroeconomic uncertainties and become a stronger, more efficient, and more flexible company.

Q4 2022 Guidance: Based on our current expectations, our net revenue for Q4 2022 will be between RMB 6 billion and RMB 6.2 billion.

Q&A:

Q1: You mentioned focusing on DAU growth, can you please elaborate on your plans for future user growth?

A1: From our work this year, we believe that there is room for improvement in B station's MAUs. We achieved 25% YoY growth in Q3, and if we continue to grow at this rate, we are certain we can achieve our target of 400 million MAUs next year.

While we value MAU growth, we've placed a greater emphasis on DAU growth this year because DAU is a better indicator of the quality and sustainability of user growth, and DAU is more closely tied to the commercial value of the platform. Focusing on DAUs will improve revenue efficiency and increase revenue, while also reducing sales and marketing expenses, ultimately helping us achieve profitability more quickly.

We've placed a high value on improving DM ratios this year, and our DAU/MAU ratio has increased from 26% last year to an average of 27% this year. We will continue to place greater emphasis on sustained DM ratio growth and aim to increase the DM ratio to 30% next year.

With this shift in focus, we will be better able to manage our marketing expenses. We've begun to control marketing expenses in 2022, with a 25% YoY decrease in Q3. With this shift in focus, we anticipate even greater reductions in overall marketing expenses in 2023.

Q2: What expenses and items have the greatest potential for improvement, and has your breakeven target for 2024 changed?

A2: We established our breakeven target for 2024 at the end of last year, and that target has not changed. Under multiple macro-environmental challenges this year, reducing losses has already become one of the most important tasks for the company. In terms of cost reduction, we have already seen some progress in reducing IT costs, and the cost of our unit bandwidth has been continuously decreasing. Additionally, our marketing expenses have also decreased this quarter, which is noticeable. Going forward, we will focus on reducing our marketing expenses to a greater degree, including reducing our internal management and R&D expenses. This is an ongoing process.

Regarding management efficiency, I will focus on "reducing our investment in non-core businesses" and "concentrating our resources on core businesses, especially those that can improve commercial efficiency." At the same time, we will optimize our organizational structure and slim down. This adjustment will be completed within this year, and everyone will be able to see the effects in the first quarter of next year.

Q3: How do you view the long-term gross profit margin and profit margin?

A3: We will take more actions to reduce costs. In 2022, we expect to see good performance in our gross profit margin. Looking ahead, we believe that our gross profit margin will gradually increase, and sales and marketing expenses will gradually decrease. Our R&D expenses are expected to reach their peak this year and may level off next year. In 2023 and beyond, we expect overall costs to decline, and our losses will gradually narrow, ultimately achieving our goal.

Q4: Regarding the advertising business, how will B station's advertising business respond to the macroeconomic weakness, and what is the outlook for growth in the fourth quarter and next year? At this point in time, will we consider launching pre-roll ads?

A4: In the third quarter, B station's advertising revenue reached 1.35 billion, a year-on-year increase of 16%, maintaining a relatively good growth rate in the overall environment. Meanwhile, B station's market share in advertising revenue has continued to increase.

In 2023, we will continue to improve our integrated marketing capabilities and strengthen the positive commercial atmosphere within the B station community. This will help more advertisers reach young B station users across different screens, scenes, and time points, making it easier for brand users to establish their brand image. Additionally, we will further integrate our advertising business with the advantages of content ecology, including improving our advertising inventory supply and accelerating the momentum of consumption and transactions within the community.

Banner ads are already a very traditional form of advertising and only account for 3% to 5% of revenue in the market. Their share is actually shrinking quickly, and prices are becoming increasingly lower. Most of B station's content is between 2 and 5 minutes, and using banner ads for all content is not only going to generate little revenue, but also extremely detrimental to user experience, so it's not worth trying for B station.

Here are some examples of ways to grow advertising revenue, such as innovative ad formats like "Native advertising" and "Bullet screen ads" within the video player, or using conversion components, including CPS combinations, to achieve a new game delivery model. Additionally, the newly added story mode is a great way to present advertising content, and incremental story mode will be a growth point for increasing advertising revenue in the future. Bilibili's advertising revenue relies on its video promotion model, including live streaming ads and information flow ads. With the combined power of our algorithm iteration and algorithm model iteration, this will significantly increase our advertising revenue. These are just a few examples of what we have done or will actively try. They will generate more advertising revenue than stickers and this growth will be both sustained and healthy.

"We are confident that our overall advertising performance in 2023 will continue to outperform the industry, achieving healthy growth and further increasing market share."

Q5: During Double Eleven, there were relevant advertising products. Can management please share more about this?

A5: In the Bilibili community ecology, we prefer to understand the term "bringing goods" as a manifestation of consumption and trading. By 2023, we will further integrate trading into the community and will incorporate trading into the advertising system.

"In the last two quarters, along with Taobao, Tmall, JD.com, Pinduoduo, and brand advertisers, we have tried to explore the conversion of grass planting consumption and trade on Bilibili." Through these similar cases, we can continuously explore the commercial value of Bilibili in different consumption and transaction scenarios.

On Double Eleven, Bilibili's advertising revenue increased by 47% YoY. Revenue from ads, especially effect-based ads, increased by over 80% YoY. In the future, Bilibili will expand its consumption and transaction format to fully utilize the power of the community and consumers. We welcome more e-commerce platforms and brand advertisers to maximize the potential for growth.

Q6: What are the strategic goals for Bilibili's game business? With the recent reopening of game approvals, what are the company's expectations for overall growth in this game business, especially for our self-developed games and overseas expansion? Can you share the latest strategic developments with us?

A6: Games have become Bilibili's core business, a natural result of the past two years. However, the development of our game business has fallen short of expectations. In my opinion, the main reason is that we have gone down the wrong path by branching out too far into self-developed games, attempting too many projects without success. As the new head of the game business, my strategy and goals for our game business will not change. I will remain firm on our previously proposed strategy of developing high-quality self-produced games for global distribution, emphasizing that gaming is Bilibili's main business.

For self-developed games, we will focus on 1-2 directions, concentrate our efforts and resources, and do the least amount of work, but do it the best in the industry. At the same time, we will strengthen our management of the lifecycle of internal self-developed projects. For projects that meet expectations, we will increase investment. For projects that do not meet expectations, we will iterate quickly.

With the Bilibili platform as our soil, I believe that whether it's self-developed games or game distribution, we can achieve sustained growth. Q7: About the operation and prospect of live streaming business?

A7: The performance of our live streaming business is in line with our expectations. In the first three quarters, our live streaming business increased by 30% year-on-year, and not only the revenue but also the gross profit margin is steadily increasing.

In our specific work, we will explore the overlap of the supply side, which is to let the upmasters become the broadcasters and the broadcasters become the upmasters. The number of people who both act as upmasters and broadcasters in Q3 increased by 73% year-on-year. This is a very high growth rate, which also represents our ability to improve the supply side.

At the same time, we also attach importance to exploring the overlap of the demand side. We can see that more and more users are watching videos and live streams of the same category. This not only improves the DAU penetration rate of live streaming, but also increases our payment rate. We can see that the MPU of our live streaming business increased by 79% year-on-year, which also comes from our exploration of the demand side.

In the last quarter, we integrated the operation of videos and live streaming into the same department. This department not only focuses on the operation of upmasters and broadcasters, but also pays attention to users who watch videos and consume in live streaming. I think this organizational structure has greatly improved the positive cycle of our videos and live streaming. The integration of organizational structure also brings a benefit, which is to discover many new operation methods for the same content category, such as our virtual broadcaster category. By better integrating virtual broadcasting and the material library of videos, virtual broadcasting can have a higher opening rate.

So I am confident that with the better integration of our live streaming and videos, our live streaming business revenue, including gross profit margin, will accelerate in 2023.

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