Bilibili: Facing Reality, Cutting Self-Development to Survive

After the Hong Kong stock market closed on March 7th Beijing time, Bilibili.US released its 2023 fourth-quarter earnings report, showing mixed results with a slight negative overall performance.

The increased loss in the current period is mainly due to one-time expenses related to business adjustments. Excluding these expenses, the trend of reduced losses remains unchanged. In the fourth quarter, Bilibili downsized its Guangzhou studio, halted some ongoing projects, and optimized its research and development team (with a 25% decrease in R&D personnel equity incentive expenses MoM). However, the costs of severance packages for laid-off employees were not recognized in the current period, which is expected to potentially drag down the pace of loss reduction in the first quarter.

Currently, the key factor for Bilibili's performance lies in the timing of the game sector's recovery. With no new games in Q1 and 2 exclusive games (of decent quality) and 1 collaborative game (under miHoYo) in Q2, there is hope for a short-term turnaround after passing the performance low point in Q1.

It is recommended to pay close attention to the conference call to see how the management outlook for this year is presented, especially regarding the expected recovery in the gaming business.

Specifically:

1. No annual guidance provided, focus on the conference call

It is worth mentioning that this time Bilibili did not provide annual performance guidance as usual. Although quarterly guidance was also discontinued last year, this signal does not leave a good impression. Dolphin Research suggests paying attention to Bilibili's conference call to see if the management provides clear outlooks. (Later, we will promptly release the summary of the conference call on the Longbridge app or user communication groups. Feel free to follow if interested.)

Here are the current market expectations for comparison: In 2024, Bilibili is expected to achieve a total revenue of 25.7 billion, a 14% YoY growth, with sub-item revenue growth rates of 8.5% for games, 11% for value-added services, 21% for advertising, and 6.5% for IP e-commerce. Additionally, it is anticipated that the GAAP operating loss rate in 2024 can be reduced to 7.8%, with a slight loss or breakeven in 4Q24.

Dolphin Research believes that the market's expectations for revenue may be slightly optimistic, but the expectations for the extent of loss reduction are conservative. After significant optimization of the self-developed team, we are more optimistic about the trend of loss reduction for Bilibili.

2. Passive user acquisition on the platform, traffic reaching its peak

In the fourth quarter, the monthly active users reached 336 million, showing a seasonal decrease QoQ. However, the user stickiness DAU/MAU is also declining against the trend (generally, in the Q4 off-season for user acquisition, user stickiness tends to increase), indicating that Bilibili's natural traffic has essentially peaked without any "special" efforts to attract users.

3. Gaming sector remains sluggish, with hope in Q2

Despite releasing 3 self-developed games and 1 exclusive game in the second half of the year, very few performed well. The highly anticipated exclusive game "优俊少女" is still in a delisted state, resulting in a 10 billion game revenue in the fourth quarter, which is a 12% decline, worse than market expectations.By now, Bilibili has basically landed several self-developed games that have been highly anticipated in the market since 2022, but their actual performance is quite evident. Therefore, in the second half of last year, Bilibili thoroughly recognized the reality, swiftly optimized the self-developed team, closed the Guangzhou studio, and suspended ongoing projects. In the next two quarters, there may still be some one-time expenses, but the monetization efficiency of the gaming business will improve.

Looking at the pipeline, Dolphin Research expects a significant rebound in the second quarter. Currently, two exclusive games and one collaborative game have been confirmed for launch. If "优俊少女" can also resume its launch in the first half of the year, the certainty of a turning point in performance will be higher.

4. Advertising Benefits from E-commerce Peak Season, Exceeding Expectations Again

In the fourth quarter, Bilibili's advertising revenue reached 1.9 billion, a 28% year-on-year increase, accelerating on a quarterly basis. This growth is mainly driven by the influx of advertising due to e-commerce platform competition, the demand for buying traffic in collaboration with live streamers, and the increase in incremental inventory from improved effectiveness in ad loading.

As we move past the previous year, the advantage of a low base will gradually diminish. Currently, the loading rate is still not high compared to similar platforms (excluding content marketing ads placed by up-and-coming creators on the platform). Future growth will mainly rely on continuing to improve the platform's loading rate.

5. Business Optimization Adjustments, Slowing Loss Reduction Pace

The gross profit margin in the fourth quarter was 26.1%, showing a trend of improvement. However, operating expenses exceeded expectations, mainly in research and development expenses and marketing expenses. In the fourth quarter, due to the closure of some self-developed teams and related gaming projects, a one-time expense of nearly 360 million was recognized, leading to high expenses for the period.

As a result, the GAAP operating loss was 1.3 billion, exceeding the market's expected 850 million. Even after excluding the impact of business adjustments, the operating efficiency is still slightly lower than market expectations.

Dolphin Research noted that the Guangzhou studio team that was disbanded in the fourth quarter has not yet confirmed the expenses for severance compensation, so it is expected that these expenses will affect the first quarter, slowing down the pace of loss reduction.

6. Limited Cash but No Need for Concern

As of the end of 2023, Bilibili had 15 billion RMB in cash and short-term investments on the books, with short-term loans of 7.5 billion (compared to the previous quarter, there was a transfer of 3 billion/400 million USD, used for the redemption expenditure of convertible bonds on April 1). This means a net cash of 7.6 billion.

Although Bilibili has not been profitable, a considerable portion of the cost is non-cash outflows for depreciation and amortization expenses, and there are also project termination expenses incurred in advance in the current period. Therefore, from a cash flow perspective, the operating cash flow is positive and does not burden the cash flow.

Dolphin Research's Perspective

Looking back at 2023, Bilibili's games were basically paralyzed throughout the year, with the main support for performance coming from advertising and live streaming. While advertising can continue to improve loading rates and live streaming can increase exposure to enhance DAU and paid users, both of these businesses have passed the low base period and will be more susceptible to industry competition in the future. Therefore, to achieve a decent recovery in overall performance (over 10%), it will still rely on the gaming business, which accounts for over 15%.

Recovery of Self.

From the pipeline perspective, although it's still quite challenging to become the main driver of revenue growth this year, once we get through the tough 2023 with a low base, the turning point for the recovery of Bilibili's game growth is approaching. In 2024, Bilibili's self-published games will have "Three Kingdoms: The World Conqueror" and "Chang'an Million Guan" expected to go live in Q2, and "Excellent Girls" is expected to resume; in terms of co-publishing, there will be miHoYo's "Zero Zone" in Q2.

In addition, in the second half of last year, Bilibili further reduced the self-developed game team, shifting the focus back to publishing and co-publishing—seeking exclusive opportunities with high-quality small and medium-sized developers and co-publishing opportunities with giants like NetEase and miHoYo. This strategic shift is actually more in line with what Dolphin Research has been hoping to see:

On one hand, in the short to medium term, in the increasingly competitive domestic gaming market with significant network effects, it's not easy to build a decent self-developed game capability. On the other hand, as a platform, how to balance the traffic distribution between self-developed games and published/co-published games is also a challenge.

Therefore, it's better to focus on "being a platform" rather than "being a product." Leveraging its traffic advantage, Bilibili can achieve more efficient commercialization in its areas of expertise such as games and subculture entertainment. The most direct short-term impact that can be reflected in the financial report is the optimization of R&D expenses.

Dolphin Research believes that although Bilibili's financial indicators are still in a slump, given the current low valuation and the expected turnaround in operations within the next 1-2 quarters, there may be a short-term trading opportunity to watch out for Bilibili in the case of undervaluation caused by the market.

Currently, Bilibili is valued at 1.3x Forward PS (valuation has further declined since the last earnings report), implying a PE ratio of 13x based on a long-term 10% net profit margin level, which is relatively low in terms of short-term profit growth and comparison with peer platforms. This also means that if games like "Three Strategies" or "Zero Zone" perform well this year, Bilibili will also have a considerable short-term elasticity. It is recommended to pay attention to the company's outlook on the gaming business during the conference call.

Detailed Performance Data Overview

Detailed Analysis Below

I. Platform User Acquisition Plateaued, Traffic Showing Signs of Peaking

In the fourth quarter, the monthly active users showed a seasonal MoM decline, and the user stickiness DAU/MAU also decreased against the trend (generally, in Q4, when user acquisition is weak, user stickiness tends to increase), indicating that Bilibili's organic traffic has basically reached its peak without any "special" efforts to attract users.

In the fourth quarter, Bilibili's overall monthly active users (App, PC, TV, etc.) reached 336 million, a YoY growth of 3%, with a seasonal MoM loss of 5 million users.

The stickiness of existing users has declined to 29.8%, with DAU/MAU ratio falling. The average daily user duration is 95 minutes, which is basically in line with guidance and expectations. However, without actively acquiring new users to expand the denominator MAU, the decline in stickiness indicates that the platform's ecosystem has reached its peak. To break through in the future, significant improvements in product experience and high-quality content are needed.

Content creators' daily active users have increased by 16% YoY, and the submission volume has increased by 31% YoY. Although there has been a slight decline in growth rate on a MoM basis, overall it is still considered stable. (Due to the disclosure caliber changing from monthly active users to daily active users, historical data is no longer directly comparable.)

II. Advertising continues to exceed expectations

Bilibili's advertising revenue in the fourth quarter reached 1.9 billion, a 28% YoY growth, accelerating on a MoM basis. This is mainly due to the influx of investment brought by e-commerce platform competition, the demand for buying traffic in collaboration with live streamers, and the increase in incremental inventory from the improvement in the loading rate of effective advertisements.

Although in terms of growth rate, Bilibili's advertising still benefits from a low base (the 28% YoY growth in the fourth quarter is much higher than the industry's 9.8% growth rate). However, in absolute terms, Bilibili's advertising revenue is still relatively small compared to its peers (Bilibili/Kuaishou DAU ratio is 1:4, Bilibili/Kuaishou advertising revenue ratio is 1:8). Apart from not engaging in e-commerce, lacking internal circulation advertising revenue, Bilibili also lags behind in external circulation advertising.

Monetizing traffic has always been a major challenge for Bilibili criticized by the market. Fundamentally, besides issues with the platform's user consumption habits, it also involves the company's chosen business model and the impact of its execution effectiveness. Only in specific areas, such as gaming, anime, and 3C electronics advertising, does Bilibili have a certain advantage in user labeling.

Entering this year, the low base dividend will gradually diminish. Currently, the loading rate is still not high compared to similar platforms (excluding the content marketing ads by creators on Huahuo). The company believes that future growth will mainly rely on continuing to improve the platform's loading rate and the enhancement of overall ecpm through Storymode ads.

In addition, the company also believes that there will be competition among e-commerce platforms this year, so the demand for external traffic acquisition still exists. For example, the cooperation between Pinduoduo and Bilibili is relatively deep. On the homepage of Bilibili, the 3rd/4th fixed video position is occupied by Pinduoduo ads.

However, Dolphin Research believes that apart from specific areas like gaming and subculture, the current e-commerce competition and the forced increase in loading rates are more short-term benefits rather than medium to long-term logic. In the medium to long term, improving precise ad recommendations and conversions is still the solid strength that Bilibili needs to enhance. At the same time, with the rise of emerging platforms like Xiaohongshu, Bilibili also needs to consider how to resist the migration and division of user time share.

III. Gaming continues to struggle, with hope in Q2

Bilibili's annual performance has been dragged down by gaming. The gaming sector continued to decline by 12% in the fourth quarter. Despite launching a few self-developed games in the third and fourth quarters ("Yojun Maiden" and others), it was challenging to make a significant impact. This further proves the weak self-developed capabilities of Bilibili. The company has also faced reality by downsizing the Guangzhou studio (originally acquired Heart Dub Interactive) in the fourth quarter and terminating the ongoing game projects.

From a deferred perspective, there was no further deterioration on a QoQ basis. Therefore, if new games are launched as scheduled in the future, the incremental impact will be more noticeable.

Specifically looking at the pipeline, Dolphin Research predicts a significant rebound in the low base of the second quarter. Currently, two independently operated games, "Three Kingdoms: Strategy to Rule the World" and "Chang'an Million Guan," and a collaborative game "Zero Zone" (miHoYo) have been confirmed for launch. If "Yojun Maiden" can also resume its launch in the first half of the year, the certainty of the performance turning point will be higher.

IV. Live streaming rewards exceed expectations

In the fourth quarter, value-added services continued to grow by 22% YoY, exceeding the market's expectation of 15%, while the platform intentionally increased the penetration rate of live streaming. However, live content regulation has been ongoing, with some platforms facing issues. The entire industry is still adjusting, and attention is needed on the impact on the future growth of live streaming.

The premium membership business is still digesting the impact due to factors like daily anime limits, update pace, and content restrictions. However, in the fourth quarter, Bilibili's premium membership reached 21.9 million, with a net increase of 800,000 QoQ, a 6.5% payment rate, and an 80% renewal rate for annual members, indicating high loyalty among faithful users.

Analysis Report: Bilibili's Business Adjustment Delays Loss Reduction Pace

In the fourth quarter, Bilibili incurred a loss of 1.3 billion, with a loss rate of 20.5%, slightly deteriorating compared to the previous period. However, within this, there was a one-time expense of 350 million due to the termination of a project by the R&D team, resulting in an operating loss rate of 15% after excluding this factor, showing a 4% improvement compared to the previous period.

The gross profit margin in the fourth quarter increased by 1%, reaching 26.1%. Apart from a certain increase in revenue sharing costs, there was a significant year-on-year decrease in bandwidth and content costs. Meanwhile, revenue also slightly increased year-on-year, leading to a substantial improvement in gross profit margin by 6% year-on-year.

However, the main cost - content costs, are relatively rigid, and the compression of bandwidth costs on the video platform itself will not be significant. Therefore, the space for cost reduction is relatively limited, and the growth of gross profit margin in the future still relies on accelerated revenue growth.

It is also challenging to further reduce revenue sharing costs, as it may affect the creator ecosystem. In the fourth quarter, revenue sharing costs increased by 12%, mainly driven by the decline in game revenue by 12%, indicating that the incremental revenue cost comes mainly from fireworks ads shared with content creators, live stream revenue shared with anchors and guilds.

In terms of operating expenses, the main decrease in the fourth quarter was in management expenses, down by 37% year-on-year, while the significant slowdown in the decline of marketing expenses, which had been optimized in the previous three quarters. In fact, the lackluster growth in Q4 user metrics indicates that marketing expenses for customer acquisition cannot be further reduced blindly, as it may further impact the platform's traffic stability.This year, there is expected to be a significant optimization in research and development expenses. Looking at the Q4 equity incentive expenses, there has been a 25% decrease in equity incentives for research and development personnel compared to the previous quarter. However, the Q4 severance compensation expenses have not been recognized in the current period yet, and it is expected to mainly reflect in the first quarter, thereby slowing down the pace of reducing losses in the first quarter, and the actual effects of layoffs may only be seen in the second quarter.