B Station: Ecological benign operation, the inflection point of reducing losses will be reflected as early as the third quarter (telephone conference minutes)

Below is the BILIBILI-W 1Q22 conference call financial report incremental information. For a review of the financial report interpretation, please refer to "Is the Carnival of Bilibili Returning to Its Original Form?".

I. Management Report

1. Our total MAU increased by 31% YoY, reaching 294 million, with DAU growing even faster at 32% YoY, reaching 79 million. The total user traffic, calculated by multiplying DAU by the time spent per user per day, increased by 52% YoY.

2. Our total net revenue for the first quarter was RMB 5.05 billion, a YoY growth of 30%. In the first quarter, our payment rate and net profit margin reached historical highs of 9.3% and RMB 27.2 million, respectively. Live broadcasting was the main driver during this period, with a 60% YoY growth in paid user memberships.

3. Sales and marketing expenses decreased by 29% QoQ, accounting for 25% of total revenue, lower than the previous quarter's 31%.

4. Membership Count: As of the end of March, we had 158 million formal members, accounting for 41%, with a stable retention rate of 83% over 12 months. As of the end of the first quarter, we had 20.1 million premium members, a YoY growth of 25%. Nearly 80% of them are annual fee or auto-renewal package users.

5. Uploader Data: The number of monthly active creators in this quarter was 3.8 million, a YoY growth of 75%. In the first quarter, a total of 1.1 million content creators received monetary compensation for their work, a YoY growth of 19%. The number of content creators with over 10,000 followers increased by 44%.

6. Number of Videos Uploaded by Creators: The average monthly number of uploaded videos was 12.6 million, a 63% increase compared to the same period last year.

1. Average monthly interaction: In the first quarter, the average daily time spent reached a record-breaking 95 minutes. Daily video views increased by 84% YoY, reaching nearly 3 billion. The total number of interactions in the first quarter reached 12.3 billion, an 87% YoY growth.

8. Story Mode:

(1) Story Mode contributed to over 20% of the total video views in the first quarter and is expected to continue growing in the second quarter.

(2) We launched Story Mode ads in April, and the initial feedback has been encouraging.

9. Gaming Business:

In the first quarter, net revenue from our gaming business increased by 16% YoY, reaching RMB 1.36 billion. We acquired a new studio in the first quarter.

Regarding the gaming pipeline,

10. Value-added Services:

Net revenue from value-added services was RMB 2.05 billion, a YoY growth of 37%, surpassing the pre-pandemic level.

11. Live Broadcasting Business:

(1) We continue to introduce more tools and features and launch new forms of interactive gifts. Meanwhile, the popularity of Story Mode enables users to discover more interesting live content. (2)

12. Advertising Services:

The revenue from advertising services was 1 billion RMB, a YoY growth of 46%. In March, some major cities imposed restrictions on logistics due to the impact of the epidemic, resulting in the postponement or suspension of some advertisements.

13. E-commerce:

Significantly affected by the epidemic, our main GMV sales have risen again as the epidemic situation improves.

14. Share Repurchase Program

In March 2022, the company announced that the board of directors had approved a share repurchase program, under which the company may repurchase up to $500 million of its American Depositary Shares over the next 24 months. As of March 31, 2022, approximately 1.4 million American Depositary Shares have been repurchased under this program, with a total cost of $30 million.

As of March 31, 2022, Chairman and CEO Chen Rui has personally purchased approximately 100,000 shares of the company's American Depositary Shares on the open market, with a total cost of $3 million.

In addition, as of March 31, 2022, the company has repurchased $147.9 million principal amount of the 2026 December Notes for a total cash consideration of $204.0 million.

II. Analyst Q&A

Q: What will be the user trend and profit trend after the unblocking in the second quarter?

A: B Station is located in Shanghai and has been greatly affected by the epidemic. On March 14, more than 8,000 employees started working from home, and it was not until June 13 that all employees were able to return to work. The impact of the epidemic on the people of Shanghai has been significant.

We believe that the epidemic has had a short-term impact on B Station's business, such as advertising and e-commerce, but we believe that it has no impact on long-term development. In the short term:

1. Advertising business: The demand for advertisers to place ads has weakened or even been postponed, so the advertising business in the first and second quarters has been affected.

2. E-commerce business: Logistics has been affected, which has affected users' orders and receipt of products, and this impact will continue into the months of April and May in Q2. After June, with the achievements in epidemic prevention and control, these impacts will weaken or disappear.

The epidemic has no impact on the fundamentals of B Station. Videoization is an unstoppable trend, the demand for cultural and entertainment content among young people continues to grow, and the consumption of culture continues to increase.

In the first quarter, MAU increased by 31% YoY, and DAU increased by 32% YoY, both higher than the YoY growth rate of the previous year, and this was achieved without increasing marketing expenses. At the same time, the quality of user growth has improved, with DAU growth exceeding MAU growth, and the growth of paying users exceeding DAU growth. As a platform-based company, B Station has set a record of the highest daily user time of 95 minutes, and user interaction has increased by 87% YoY. All the data growth is fast and healthy.

We have gradually achieved our user growth goals and are more focused on the quality of our users, as well as our spending on marketing. In terms of business, as the impact of the epidemic decreases in June, the growth rate of our various business lines is rapidly recovering. Q: Regarding the story mode, how does the management view the role of story mode in the content ecosystem and business model?

A: Story mode users on Bilibili are purely incremental, as they watch a lot of vertical short videos while watching PUGV videos. In terms of data, our video views have grown by 84% YoY, and story mode contributes to over 20% of the total traffic. Even if we exclude the contribution of story mode, the growth rate of PUGV is still around 50% to 60%.

We have already positioned story mode as a unique form of content on Bilibili, providing consumers with easy-to-consume content during fragmented time periods, which complements our existing PUGV content. Additionally, creating short videos is very simple for our long video creators. Furthermore, Bilibili is not just a tool-oriented product, but actually a content and community platform.

From the user's perspective, they choose products based on content verticals rather than industry categories. For example, a gaming enthusiast not only watches gaming PUGV and gaming-related live streams but may also play games produced or authorized by Bilibili.

The short video format is already very mature and has many successful precedents, with high ad conversion rates and live stream conversion rates, which will bring more commercial opportunities to Bilibili.

Q: Regarding advertising, I agree that Bilibili's long-term fundamentals are not affected by the epidemic, but rather related to the average monthly total market, user consumption rate, and platform advertising technology. Can you provide some short-term trends in advertising, such as which part of the advertising will recover faster during the epidemic, which ones will be slower, or which types of advertising products are more likely to be affected by the epidemic? And how do you view the advertising growth trend after the lifting of restrictions?

A: In Q1, Bilibili's advertising revenue was 1.04 billion yuan, a YoY growth of 46%. The impact of the epidemic has caused delays in advertisers' placements. Bilibili's characteristic is that it has high user value and can have a long-term impact on users' minds. We believe that in the future, advertisers will be more inclined towards platforms with high user value and conversion rates.

Even without increasing marketing expenses, Bilibili has still achieved advertising growth, which indirectly demonstrates the importance of advertisers' attention to Bilibili and the brand strength of Bilibili. Although the short-term advertising business may be affected, it will still achieve long-term growth.

In Q1, gaming, 3C, digital, food, and beauty are our advantageous categories, with gaming and automotive being particularly prominent. Faced with macro uncertainties and short-term fluctuations, we focus on doing long-term and right things, including the integration of standardized and industrialized marketing capabilities, while continuing to strengthen the construction of the commercialization mid-platform based on product and data capabilities through rapid iteration.

We are also expanding our advertising scenarios by integrating multiple products and multiple scenes, including PC, mobile applications, iPass, smart TVs, as well as PUGV, OGV live streaming, and moment pages.

At the same time, we will further expand and invest in commercial initiatives for story mode, launching more advertising products that align with the Bilibili ecosystem. Currently, we have over 24,000 content creators and over 6,500 advertisers joining our Huohua platform. We believe that this figure will double this year. For the second half of this year, we will focus on accelerating the integration process between native advertising and more standardized advertising products. For example, in the first quarter, over 40% of our advertising clients purchased other standardized products, which were paired with their fireworks orders.

We have found that video-based apps have better conversion rates than traditional apps. On the other hand, story mode also provides significant incremental traffic and revenue growth for our advertising business. We will continue to do the right things in the second half of the year and invest for the future.

Q: Regarding the live streaming business, I would like to ask about the impact of recent policies and the outlook for the future?

A: The recent regulatory policies have no impact on our live streaming business, and our goals for the live streaming business this year will not change. Bilibili's live streaming is a natural extension of our video ecosystem, and we expect the number of live streaming users to continue to grow healthily in the future.

Q: What are the strategic priorities for profit margin and cost control? Will profit control be given a significant emphasis? Will the non-GAAP profit turnaround target for 2024 announced last quarter be affected? What is the trend of gross margin in the second quarter and the second half of the year?

A: The gross margin pressure in this quarter mainly comes from the impact of the pandemic, which has slowed down revenue growth rather than increased expenses.

The relationship between user growth and cost savings is not significant. Bilibili's user growth is mainly driven by the ecosystem rather than marketing and external advertising. Our user retention rate and activity level have always been good, and we will optimize the ROI of user growth in the future. However, this optimization will not affect the overall trend of user growth or our user retention rate. Regarding the importance of cost control, since the beginning of this year, there have been changes in the domestic and international situations, and the industry's difficulties are not solely due to the pandemic. In such circumstances, cost reduction and efficiency improvement are more important tasks than those specifically related to the pandemic. Our focus should be on deepening our core business rather than expanding it.

The gross margin in the first half of the year was affected by the pandemic, but it will improve in the second half of the year as revenue grows. For Bilibili, in order to achieve a balance between profit and loss, in addition to cost reduction and efficiency improvement, expanding our revenue is equally important.

Our goal is to increase our conversion rate, expand our market share in advertising, and improve our profit margin in the second half of this year. Even in the first quarter, we saw an increase in the gross margin of our live streaming and advertising businesses quarter by quarter, and this trend will continue in the second half of the year. The results of cost control measures taken in the second quarter will be more evident in the second half of the year.

Regarding investments, we will closely monitor the progress of each project and make adjustments when necessary to improve our overall capital efficiency. As our revenue expands, our loss rate will naturally decrease.

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