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

On the evening of March 2, Beijing time, bilibili (Nasdsaq:BILI;HKEX: 9626) released its results for the fourth quarter and full year of 2022, which ended December 31. Bilibili's total net income in the fourth quarter was 6.1 billion yuan ($890.6 million), an increase of 6 percent compared with the same period in 2021, according to the financial report. The net loss was 1.5 billion yuan ($217.1 million), a 29% reduction from the net loss of 2.1 billion yuan in the same period in 2021. Without Non-GAAP, the adjusted net loss was 1.3 billion yuan ($190.6 million), a 21% reduction from the net loss of 1.7 billion yuan in the same period in 2021.

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 transcript of the question and answer session of the analyst in this conference call:

JPMorgan analyst Daniel Chen: my question is about the outlook for 2023. In the current environment of China's opening up and economic recovery, what are the company's core strategies and main concerns?

Chen Rui: we can see that since last year, the development of the entire Internet industry has entered a new stage, that is, every company will focus on more quality growth, profits and cash flow. And not just domestic companies, we see Internet companies in the United States doing the same thing.

For bilibili, our focus this year will be to increase income and reduce losses and pursue healthy user growth. This will be a long-term strategy, and it will not change due to short-term environmental changes. Just now you asked whether there will be any changes in the environment of economic recovery this year. I think the economic recovery environment should help us to better implement the above strategy.

This year, our company's business will be more focused, and there are two most important things for the whole company: the first is to increase revenue and reduce losses, and the second is the healthy growth of DAU (daily active users), which I just mentioned. The "increase in income" here refers to the growth of gross profit, and we will pay more attention to raising gross profit margin and reducing loss this year. You can see that the company's gross profit margin increased year-on-year and month-on-month in the fourth quarter, and our net loss decreased by 29% compared with the same period last year. We expect the company's overall loss to narrow more significantly in 2023 and achieve the goal of breaking even by 2024.

In terms of user growth, we will no longer simply pursue MAU (monthly active users) data in 2023, we will focus on more quality DAU growth and the improvement of DAU business value conversion efficiency. We will increase the DAU / MAU ratio in 2023. The current ratio is 28%, and we should mention 30%. This means higher user activity, higher user stickiness, and greater business value provided by users.

Finally, I would like to emphasize that bilibili's foothold has always been our community and content ecology. No matter what kind of development strategy is discussed, community and content ecology are the foundation of bilibili.

This year marks the fourteenth year since bilibili was founded. In the past decade, we have experienced three major cycles: the PC Internet cycle, the mobile Internet cycle, and the upcoming AI era cycle. Over the past decade, no matter how the industrial environment changes, no matter how the development of the technology platform changes, bilibili's community and the content ecology of PUGV (professional user-generated videos) have been the inherent driving force of our content growth. We believe in the value of high-quality content, as well as the value brought by quality creators. So I think community and content ecology have always been our most advantageous competitive barriers and the basis for us to keep going through the cycle. We are confident that bilibili's content ecology can continue to produce good content, and we are also confident that we can continue to produce the most attractive and talented UP owners on our platform. I think this is the core value of bilibili, we will continue to enlarge this value, so as to achieve sustained and healthy user growth.

Xueqing Zhang, CICC analyst: I'd like to ask you about the financial outlook. Management has just mentioned that the company's gross profit margin has continued to rise in the past few quarters. How does the management look forward to the specific trend of gross profit margin this year? I see that the management has given us bilibili's revenue-side guidelines for the whole year. Could you ask the management to give us a brief introduction to each line of business? Finally, if you look at the profit side, how does management view the specific trend of loss reduction for the whole year?

Fan Xin: Chen Rui just mentioned that the main goal of the company this year is to increase income and reduce losses. For this reason, you can see from our 2023 revenue guide that we have reduced some of our low-margin businesses, such as e-commerce. We expect revenue from businesses such as e-commerce to fall by 25% and 30% in 2023, but the gross profit margin will increase compared with the same period last year. For non-e-commerce businesses, such as games, investment and advertising, we believe that the combined revenue of these businesses will grow by more than 20% year-on-year in 2023. In terms of gross margin, revenue growth will lead to an increase in gross margin, especially in fixed-cost businesses, such as servers, bandwidth, staff costs and content costs.

All in all, in 2023 we will be more selective and focused on ROI (return on investment) in the field of content investment.

In terms of revenue-sharing costs (revenue-sharing cost), we expect gross profit margins across all lines of business to increase year-on-year. The proportion of high-profit businesses will gradually increase, and revenue-sharing costs will be further improved; in terms of operating expenses, total operating expenses will peak in 2022 and we expect to decline in 2023; in terms of marketing expenses, the company's marketing expenses have been cut by 15% in 2022, and marketing expenses are expected to be further reduced in 2023. In addition, the company's SG&A (administrative expenses) and R & D expenses (in absolute dollars) will also decline in 2023.

Taken together, we expect the company's gross margin to gradually rise to around 25 per cent in 2023 and non-GAAP losses to narrow significantly.

China Renaissance Capital Investment analyst Yiwen Zhang: my question is about advertising. How does management view the changes in the advertising market in 2023? What are the prospects? Another question is related to the product side, what is the latest progress in Story-Mode? What are the developments of bilibili's advertising products in 2023?

Li: first of all, let's talk about Story-Mode. Multi-screen / multi-scene is one of the relatively key strategies for bilibili's user growth. In 2022, bilibili's user activity reached 28%, and our average daily user time reached 96 minutes, which proved that this strategy is extremely effective. As a part of bilibili's community, Story-Mode is actually a new scene. Story-Mode is a very important supplement to the original PUGV and OGV (organization-produced video) live streaming, including OTT large-screen scenarios. We have also observed that since the launch of Story-Mode, the promotion effect of bilibili's low active users is extremely obvious, and the introduction of new creators in the whole network has also played a key role. In addition, we see that the performance in terms of playback volume and use time is also higher than expected. Bilibili users can use bilibili to meet their consumption needs of the content itself in any scene, at any time, and in the case of any demand.

Bilibili has always been a video community with high-quality creators and high-quality content as the core. PUGV has maintained a healthy and rapid growth since the founding of bilibili, growing by more than 50% in the fourth quarter compared with the same period last year. So when we mention Story-Mode, don't forget that bilibili's PUGV ecology has been growing continuously and healthily. The year-on-year growth of Story-Mode also exceeds 170%. The traffic of Story-Mode in 2023 will further improve healthily. Both creators and content consumers, we have observed that their aesthetic and demand for content is getting higher and higher. Therefore, we firmly believe that the "container" of Story-Mode will provide a steady stream of new creators and creativity for the ecology of PUGV. At the same time, the new traffic brought by Story-Mode, combined with bilibili's existing ecology, will not only greatly improve advertising efficiency, but also provide more new business opportunities for live streaming and advertising.

Advertising. As we all know, the advertising market did not perform very well in 2022, such as small-digit growth and so on. However, in this challenging year, bilibili's overall market share has continued to increase. Our annual income is over 5 billion.

In 2023, advertisers are slowly beginning to regain confidence, and the advertising industry as a whole is expected to have a chance to achieve double-digit growth. But advertisers will be more cautious than ever and pay more attention to the core value and overall effectiveness of the ads they place. Usually at this time, we will pay attention to what is the core problem that advertisers want to solve when they invest in the budget every year? To sum up, there are several types: first, the development of new products; second, brands are afraid of aging and must be continuously infiltrated; third, continue to affect the minds of users to achieve the effect of transforming consumption. Looking back from this point of view, you can find that bilibili's entire ecology and product form have already covered the above key needs. Therefore, in the advertising business system, we are still confident that bilibili's performance this year is higher than the growth rate of the industry as a whole.

In 2023, we will upgrade the sales form and mode of the industry, and integrated marketing is still bilibili's long-term growth engine. First of all, in the strong industry, we will upgrade the full link to build higher barriers, including familiar games, 3C digital and so on. Take games as an example. Bilibili is the largest game community in the network, with nearly 90 million consumers. Coupled with the recent normalization of the release of game version numbers, these are relatively favorable conditions for us. In the first quarter, we will integrate the three major teams of game intermodal transport, game advertising and game content into one big goal, hoping to provide more complete services for game manufacturers, and ultimately improve the overall distribution efficiency of game content and game downloads. We hope that after entering the bilibili community, each game can quickly reach users and achieve its long-term operation in bilibili, until it achieves its goal of deep transformation and in-depth operation on bilibili.

Bilibili actually has some businesses that want to expand their share, such as e-commerce, automobile, fast consumer, and so on. These are all areas of the industry with large budgets. Take e-commerce as an example, bilibili is the only video content ecological community in the industry that insists on making a big open loop. Last year, we have reached cooperation with Alibaba, JD.com, pinduoduo and so on. In addition to brand effect advertising, we have also further improved the cooperation model of product promotion, recommendation and transformation transaction. In 2022, more than a thousand new brands and more than 10, 000 SKU successfully launched in bilibili by bringing goods, and the effect was translated into advertising to achieve higher-than-expected revenue. Therefore, recently, we will also integrate the video and live delivery system, explore the open-loop trading model that belongs to bilibili, and make this model better. At the same time, we will also rapidly increase the budgets of the e-commerce industry and merchants this year.

In addition, how to improve the efficiency of algorithmic infrastructure, the application of AIGC (artificial Intelligence to generate content), the building of data capacity, how to provide users with more scientific marketing data as their basis, the continued development of business scenes, the promotion of bilibili's ecological business atmosphere, and so on, these are all the right things we have been doing since 2022 and will be the focus of our work in 2023.

Merrill Lynch Bank of America analyst Lei Zhang: my question is about games. What are the management's prospects for the game business in 2023? How is the self-development game strategy going so far? With the restart of the version number, does bilibili face some new game opportunities?

Chen Rui: the whole game industry has entered a new stage in 2022. Version number is only one of the reasons, I think a bigger reason is that the dividend of mobile users is gradually fading, and players' requirements for the quality of the game are becoming more and more mature. In fact, this has a great impact on the industry, and one of its direct effects is the increase in game development costs and the decline in the success rate of new games.

When there is a user dividend, as long as you do a good job in the content of the game, you will certainly be able to make money, but when the game industry becomes a stock market, there are only two kinds of games that can make money: the first is the super game of the head. the second is to become the head in a certain category. Only in these two cases can you make a sustained profit.

So bilibili's game development strategy is also preparing for the future industry trend. We will be more determined to implement our strategy: "boutique self-research, global distribution". I think that's what we have to do in the next cycle of the gaming industry. Only global distribution can offset higher game development costs and achieve better profits; only boutique games can become long-term operational games and provide better ROI.

In terms of categories, we will be more focused. Whether it is agency business or self-research, we will focus on the areas we are good at, such as two-dimensional cards and other areas; in self-research, we will reduce self-research projects and devote more energy to projects with the highest success rate to polish high-quality products.

In terms of the results, the results of our self-developed games are still slowly emerging. Last year, self-developed games accounted for 5% of the total revenue of our game business, and this proportion will continue to increase this year.

As for the version number, we can see that the domestic version number is basically issued once a month, and the import version number has also been resumed, so we think that this year's version number policy will gradually become normal. This is good for bilibili, not only for our self-developed games, but also for our agent games. At the same time, it is also good for our game intermodal transport business and game advertising business. This must be good news.

We can also tell you in advance that we will have two self-developed games online in the second quarter of this year.

Goldman Sachs analyst Lincoln Kong: just now the management also mentioned that we are going to face the AI era. AIGC actually got a lot of attention this year. Could you ask the management to share with us what applications bilibili may have in AIGC in the future? What products and opportunities for commercialization will AIGC bring?

Chen Rui: I think AIGC will be a big event that the whole industry and even the whole society should pay attention to. What does it mean? It means a huge increase in the productivity of content creation. I think the event that can be compared with this promotion is the previous mobile phone camera, because the mobile phone camera allows ordinary people to produce content anytime, anywhere. The role of AIGC is to greatly improve the efficiency of the output of content, while greatly reducing the cost, so that more people can create content.

For bilibili, I think AIGC can bring great benefits to bilibili. For the industry as a whole, I think all content platforms can benefit from AIGC. Bilibili has two attributes: first, it is a massive content platform; second, it is an UGC content platform. On both of these points, I think AIGC will be a great help. For example, in the search experience, AIGC will bring great gain to bilibili's search experience. Similar to ChatGPT,AIGC, it can undertake more complex search requirements. For example, there are many product evaluation videos on bilibili. Through AIGC, we can ask it, "what is the valuable information about bilibili's evaluation of the new generation of AirPods?" through AIGC, we can directly tell users the valuable clips in a video, whether it is a video clip or translated into text.

We all know that bilibili has a lot of knowledge and structured video content, and a lot of video content has good historical value, maybe everyone will watch it in a few years' time, because it is intellectual. So the ChatGPT-like search experience I just mentioned can give full play to the accumulated value of bilibili's content, and also enable users to consume bilibili's structured content more efficiently.

In terms of UGC platform, I think AIGC can greatly improve the efficiency of creators. If AIGC technology is used in authoring tools, it can make more users create content in a simpler way, and it can also allow the same material to be presented in different ways in different videos, which can directly improve the productivity of creators and enable more creators to create content experiences that only professionals can do before. With AIGC technology, ordinary users may now be able to do it.

The third benefit of AIGC is in the main aspect of virtual UP. As we all know, bilibili has now become the largest virtual UP host platform in China. We have tens of thousands or even hundreds of thousands of virtual anchors and virtual images active on bilibili. AIGC can make these virtual images more automatic and humanized. For example, in the past, Luo Tianyi may only read lines, but now Luo Tianyi can really talk to every user, and the content of the dialogue is also thousands of people. The gain of AIGC to virtual images is huge, and these virtual images may really become a virtual human. So I think in terms of virtual anchors and virtual UP hosts, we continue to pay attention to and follow up the improvements that AIGC can bring.

The essence of bilibili is a platform that connects creators and consumers. Therefore, all the technologies that can increase the productivity of creators and expand the scale of creators are a great gain for bilibili. For example, when moving from PC to mobile, there was a change of "expanding creators and making it easier for creators to make videos", and this change directly increased bilibili's number of users tenfold. So I think AIGC can bring about similar changes. If it is easier to make videos, and if more people can make videos, then the platform will be able to produce better content and the platform will be easier to attract users. To sum up, I am looking forward to the development of the next era brought about by AIGC.

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