Shulou(Shulou.com)11/24 Report--

According to news on the evening of November 29, Beijing time, bilibili (Nasdsaq:BILI;HKEX: 9626) today released its financial results for the third quarter of 2022, which ended September 30. Bilibili's total net income in the third quarter was 5.8 billion yuan ($814.5 million), up 11 percent from a year earlier, according to the financial report. The net loss was 1.7 billion yuan ($241.2 million), down 36 per cent from a year earlier. Excluding non-GAAP, the adjusted net loss was 1.8 billion yuan ($248.1 million), compared with an adjusted net loss of 1.6 billion yuan a year earlier.

After the release of the results, bilibili Chairman and CEO Chen Rui, Vice Chairman and Chief operating Officer Li Mi and CFO Fan Xin and other executives attended the subsequent earnings conference call to interpret the main points of the results and answer analysts' questions.

The following is the main content of the analyst Q & A session in this conference call: JPMorgan analyst Daniel Chen: my question is about user growth. Just now in the briefing, the management mentioned that the focus of user growth should be on DAU (number of daily active users). Could you ask the management to explain bilibili's user growth plan in the future?

Chen Rui: our user growth-centric strategy was proposed in 2019, when our MAU (monthly active users) was 110 million. Previously, we have been using MAU as an indicator of user growth. In the past three years, we have grown from 110 million to 330 million in this quarter. The tripling of MAU growth in the past three years proves that bilibili's "community + ecology"-driven growth model is successful, and it also proves that bilibili can achieve rapid growth while maintaining high-quality users. Judging from our work this year, we think there is still a lot of room for improvement in bilibili's MAU. We achieved 25% year-on-year growth in the third quarter. According to the current growth model, I think the target of 400 million MAU next year will certainly be achieved.

While paying attention to the growth of MAU, we also attach great importance to the growth of DAU from this year (2022). Compared with MAU,DAU, it is more representative of the quality and sustainability of user growth, and DAU is more tied to the value of commercial realization of the platform. In my opinion, "increasing the number of users" is a means, and "doing high user value" is our goal. The end result of MAU growth is actually DAU growth. So you can see that we attach great importance to increasing the proportion of DAU to MAU this year. The ratio of DAU to MAU was 26% last year, but it has increased this year, with an average of 27%.

Since the beginning of this year, we all know that there have been many changes and challenges in the macro environment. Therefore, we also regard narrowing losses as one of the very important indicators in our work. In this case, we will certainly pay more attention to the quality of user growth in terms of user growth. Relatively speaking, we shift our work to DAU-based, on the one hand, it will help to improve cash efficiency and income, on the other hand, it can also reduce marketing expenses, so that we can break even faster.

We are very confident in the growth of DAU, and we believe that this growth will be more sustainable and more conducive to commercialization. When doing specific work, we will also pay more attention to the continuous improvement of the ratio of DAU to MAU, and we will strive to increase the ratio to 30% next year.

As the focus of our work shifts, we will have better control over market costs. In fact, since 2002, the company has begun to control market fees, and you can see that market fees fell by 25% in the third quarter compared with the same period last year. With the change of our focus, the overall market cost next year (that is, 2023) will be much lower than that in 2022.

Merrill Lynch Bank of America analyst Lei Zhang: my question is mainly about costs. I can see that bilibili's loss in the third quarter has obviously narrowed. Can the management share with us what are the driving factors behind this? Which cost and expense items have more room for improvement in the future? How does the management view the trend of the company's long-term gross margin and profit margin? Has bilibili's current goal of break-even changed?

Chen Rui: at the end of last year, we put forward the goal of breaking even by 2024. This goal will not change, and under the challenges of multiple macro environments this year, loss reduction has become one of the company's most important tasks. And that's what I'm keeping an eye on.

In terms of cost reduction, we have now begun to do so and have seen some results. For example, with our reduction in IT costs, bilibili's cost per unit of bandwidth continues to decrease, and we can see that our market fees have also been reduced to a certain extent in this quarter. The next thing I will focus on is the greater reduction in the company's market costs, which will be an ongoing process in the future. The company's internal management and R & D costs will also be reduced.

In terms of management efficiency, I will focus on reducing the investment in the company's non-core business and focusing resources on the core business, especially on the work that can improve the efficiency of commercialization. At the same time, we will optimize the organizational structure and "lose weight and lose weight". This part of the adjustment will be completed within this year, and you will see results in the first quarter of next year.

Fan Xin: as for the trend of the company's long-term gross profit margin and profit margin, we will take further action to reduce costs and increase efficiency, and it is expected that the company's gross profit margin will gradually increase in the future. Chen Rui has just mentioned that our marketing expenses will decline in 2022 compared with the same period last year, and it will be the same next year. The company's R & D spending will peak in the fourth quarter of this year (2022) and will fall next year. As for 2023 and beyond, our overall operating expenses (in absolute dollars) will decline year by year and our losses will further narrow until we break even. At the same time, in order to narrow losses, the company will keep a close eye on cash flow, strictly control capital expenditure and investment, and keep the cash balance at a healthy level.

Xueqing Zhang, CICC analyst: I'd like to ask the management about advertising. Just now the management mentioned the COVID-19 epidemic and the macro-weak environment. How will bilibili's advertising business deal with the current environment? How does management look forward to growth in the fourth quarter and next year? In addition, I noticed that the company "brought" some advertising products during the "Singles Day" period. Can the management share with us? Finally, at the current point in time, will bilibili consider launching pre-patch ads?

Li Mi: this year's environment is still quite complex and full of challenges, and everyone is aware of this year's economic and macro conditions, epidemic situation and so on. Bilibili's advertising revenue reached 1.35 billion in the third quarter, an increase of 16% over the same period last year. We still maintained a relatively good growth rate in the current environment. The increase in effect form advertising has also exceeded 50%. At the same time, we also see that bilibili's market share in advertising revenue continues to increase.

In 2023, we will continue to improve our integrated marketing capabilities. at the same time, we will also strengthen the positive business atmosphere in the bilibili community to help more advertisers reach bilibili's young users on different screens, different scenes and different time points at the same time. This makes it easier for brand users to build their mental assets. At the same time, we also mentioned in the conference call last quarter that the company will further combine the advantages of content ecology to develop the advertising business, including increasing the supply of advertising inventory, etc. at the same time, we will also accelerate the potential energy of consumption and trading in the community. For example, for categories such as games and 3C digital, bilibili's market share should be in the top five; for example, fast consumer goods, such as food and beverages, beauty and makeup, and other commodities that young people must use in daily life, (this part) has also achieved sustained growth in bilibili's advertising revenue. There are also some major trend categories in the future, such as cars, mothers and babies, home appliances, and so on. With the growth of young people in the bilibili community, (we also see great potential in these categories), automobile category advertising also grew by more than 80% in the third quarter compared with the same period last year.

As for the word "carrying goods" you mentioned, people like to mention the word "carrying goods" very much in the industry. In bilibili's community ecology, I prefer to position and understand it as "a form of consumption and transaction". Consumption and transaction is one of the infrastructure in bilibili community. Only under the premise of infrastructure, (consumption and transaction) is bilibili's most important commercial consumption scene.

In 2023, we will further integrate transactions into the community and advertising system. For example, in the last two quarters, we have tried to recommend consumption on bilibili with Taobao, Tmall, JD.com, pinduoduo and brand advertisers, while exploring the transformation of transactions, such as including content with goods in videos and live broadcasts. In addition, bilibili's unique advertising portfolio. Through these cases, we can constantly tap bilibili's commercial value in different consumer transaction scenarios.

Despite the adverse trend in the general environment on the "Singles Day" day, bilibili's advertising revenue increased by 47% compared with the same period last year, and the revenue from effective advertising also increased by more than 80% compared with the same period last year. In the future, bilibili's overall consumer transaction form will be further opened up and expanded. We welcome more brands and e-commerce to join us. Bilibili will also work with all e-commerce platforms and brand owners to enlarge the potential energy of the community and consumers as much as possible.

As for patch ads. In fact, patch advertising is already a very traditional form of advertising. The market's revenue from patch advertising accounts for only 3%, 5%, the proportion is shrinking rapidly, and the unit price is getting lower and lower. Therefore, the judgment of the market on the landing of patch advertising in bilibili is too optimistic. Bilibili's content is mostly concentrated in 2-5 minutes, if all the content is in the form of patches (advertisements), the income is actually relatively small, and it will greatly damage the user experience. So this kind of traditional advertising form and mode bilibili will not try easily.

I can give you some examples. For example, it would be a good attempt to implement innovative advertising patterns in video players such as native ads and on-screen comments on bilibili; for example, we can use conversion components, including CPS combinations, to implement a new release model of the game, which is also called "game partner" internally. For example, bilibili's new Story-Mode, it is also a good advertising form to show the carrier, the subsequent increment of Story-Mode will become the growth point of advertising revenue. In addition, I also found that bilibili saw the video business order, "live merchant single plus take-off" model, it depends on the video promotion model plus bilibili algorithm. If the iterative ability of the algorithm model can be strengthened, our advertising revenue will also have a relatively large growth.

I just cited some examples that companies have done or will actively try, all of which generate more advertising revenue than sticker advertising, and the growth is sustained and healthy.

We are still very confident that the overall performance of bilibili's advertising business will continue to outperform the industry market and achieve healthy growth in 2023. At the same time, we will also try to further increase our market share.

Goldman Sachs analyst Lincoln Kong: my question is about the gaming business. I see that Chen Rui has taken over the game business by himself. What changes will be made in the strategic goal of bilibili's game business in the future? Recently, the game version number has also been restarted, what is the company's expectation for the growth of the overall game business in the future? Especially in bilibili's self-developed games and the expansion of overseas games, can the management share the latest strategy and progress with us?

Chen Rui: I remember that I proposed in 2019 that video and games are bilibili's main business. The so-called "main business" refers to the core business of a company. Bilibili's game business started relatively early, and it is a natural result that we choose to do game business, because bilibili is the platform with the highest concentration of game users in China; at the same time, many of our live streaming and video content are related to games; there is also a strong synergy between the original animation, original comic IP and games we are doing.

In the past two years, I think the development of bilibili's game business is not as good as I expected. The main reason is that I think we have taken some detours in game self-research. In the past two years, our game self-research has been too open, and multiple teams are exploring in multiple directions at the same time. The result of this approach must be to dabble in it-- too much, but to no avail.

In fact, my personal responsibility for the game business will not change the strategy and goal of the game business. On the contrary, I will be more firm before the "self-research boutique, global distribution" strategy, but also more emphasis on the game business is the positioning of bilibili's main business. It is not that there will be any change compared with the past, on the contrary, I will really implement the strategy emphasized in the past, which is what I will do when I take over the gaming business.

In terms of self-research in the game, I will only focus on 1-2 directions, focusing on bilibili's energy and resources to do the least, but to do it, it is best to do it in the industry. At the same time, I will strengthen the management of the life cycle of self-research projects within the company: for projects that meet expectations, we will increase investment; for projects that do not meet expectations, we will quickly iterate out.

Next, my requirement for the game business is to do a good job in products and business. I also believe that because of the soil of bilibili platform, whether it is game self-research or game distribution in the future, we will be able to achieve sustained growth.

China Renaissance Capital Investment analyst Yiwen Zhang: my question is about bilibili's live broadcast business. After the last round of organizational structure upgrading, live and VOD integrated operation has also been going on for some time. Can management share the new strategy with us? What are the management's prospects for the live broadcast business?

Chen Rui: bilibili's live broadcast business performance is still in line with our expectations. In the first three quarters, our live broadcast business grew by 30% compared with the same period last year. Not only is our revenue growing, but our gross profit margin is also steadily increasing. In the past, I have always stressed that live broadcast is a capability of bilibili platform, and it is a natural extension of bilibili's content ecology. This sentence also represents bilibili's thinking of doing live streaming-- to realize the positive cycle of video and live streaming by combining bilibili's content ecology as much as possible.

In the specific work, we will explore the overlap on the supply side, that is, let the UP master become the VJ and the VJ become the UP master. The data we saw in the third quarter is that the number of users who are both UP hosts and anchors has increased by 73% compared with the same period last year. This is a very rapid growth, and it also represents the improvement of our capacity on the supply side. At the same time, we also attach importance to tapping the overlap on the consumer side. It can be seen that bilibili has more and more users watching both videos and live broadcasts of a certain category. This not only increases the DAU penetration of bilibili LVB, but also increases our payment rate. As you can see, the MPU (average number of monthly paid users) of bilibili LVB has increased by 79% compared with the same period last year, which also comes from our exploration of the consumer side.

Last quarter, we integrated the video operation and the live broadcast operation into the same department in the company's organizational structure. This department works as both a UP host and an anchor; it focuses on both the users who watch the video and the users who consume during the live broadcast. I think this organizational structure has really improved the positive cycle of bilibili's video and live streaming to a greater extent. The integration of this organizational structure also brings an advantage: for the same content category, video operators and live streaming operators can find many new ways to operate after they are integrated into a team. For example, virtual VJ category, through the deep integration of virtual broadcasting and video material library, we can further improve the launch rate of bilibili virtual VJ. For example, we always thought that UP master of knowledge category was not suitable for LVB, but with the integration of organizational structure, we found that this was not the case. For example, the knowledge UP master of the legal category or the UP master of the knowledge area of the emotional category can connect with users to answer questions through live broadcasting, and the answer effect is very good. As a result, bilibili also gave birth to the legal UP master who has increased his fans by 1 million as a result of live broadcasting. In fact, these new modes of operation are excavated by us after the integration of the organizational structure.

To sum up, I think with the further combination of bilibili live broadcast and video, I am confident that bilibili's live broadcast business income and gross profit margin will rise significantly in 2023.

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