Bilibili: Confident in Sustaining High Growth in Advertising (4Q23 Earnings Call Summary)

The following is the summary of the earnings call for the fourth quarter of 2023 of Bilibili.US. For an interpretation of the earnings report, please refer to "Recognizing Reality, Self-developed Survival"

1. Review of Core Financial Information:

2. Details of the Earnings Call:

2.1. Key Points from Executive Statements:

1. Operational Aspects:

   I. Community Growth:

   1. Monthly Active Users: As of 2023, the monthly active users reached 336 million, demonstrating strong user growth.
   2. Average Daily User Online Time: In the fourth quarter, the average daily online time exceeded 95 minutes, reflecting high community activity and user stickiness.

   II. Commercial Efficiency:

   1. Advertising Revenue: YoY growth of 28% in the fourth quarter and 27% for the full year, indicating the effectiveness of advertising strategies and market demand growth.
   2. Value-added Services Revenue: YoY growth of 22% in the fourth quarter, reaching 2.9 billion RMB, with a full-year growth of 14%, demonstrating the company's success in expanding commercial channels.
   3. With the above growth, total revenue for the year reached 22.5 billion RMB, with an increased contribution from advertising revenue, rising from 23% in 2022 to 28% in 2023.

   III. Core Pillar—Content:

   1. Growth of Content Creators: YoY growth of 16% in daily active content creators, with a 31% increase in monthly new content submissions, indicating strong platform attractiveness.
   2. Income and Recognition for Content Creators: ① Over 3 million content creators earned income on the platform, with a 133% YoY growth in content creators earning revenue through video and live commerce. ② The 6th Bilibili Cheer 2023 Awards recognized the top 100 creators, with 39 creators receiving the award for the first time, accumulating over 400 million fans.
   3. Content Viewing and Interaction: Average daily video views increased by 25% YoY, reaching 4.3 billion views; monthly average interaction increased by 14% YoY, exceeding 15 billion times.
   4. Growth in Content Categories: The fastest-growing categories in video views were baby and maternity, automotive, travel, fashion, and clothing.

Core Pillar - Community:

1. User Growth and Engagement:

   • The average age of active users is 24 years old, making the platform quite popular among young people.
   • The average daily usage time per user is 97 minutes, with a total of 230 million official members, an 18% increase YoY. The 12-month retention rate remains at around 80%, demonstrating high user stickiness to the platform.

2. Community Activities:

   • The 5th New Year's Eve Gala has become a must-watch online celebration for young people, garnering 1 billion replays within 24 hours, receiving the highest industry sponsorship participation in history.

Core Pillar - Commercialization:

1. Live Broadcasting Business:

   • By converting more hosts from the pool of video content creators, the live broadcasting business continues to diversify.
   • Plans for 2024 include further integration of live broadcasting with the video ecosystem, introducing more high-quality hosts, strengthening tools and recommendation algorithms to increase the number of paid users.
   • Unique live broadcasting content and products (such as V-Tubers and acceleration systems) will continue to enhance paid activities, increasing monetization opportunities.

2. Membership Business:

   • By the end of 2023, there are 21.9 million premium members, with over 80% choosing annual subscription or auto-renewal packages.

3. Advertising Business:

   • Advertising revenue in Q4 increased by 28% YoY, with a full-year growth of 27%.
   • Significant growth in performance advertising revenue, with a QoQ increase of over 60% and an annual increase of over 50%.
   • By strengthening cooperation with e-commerce platforms and data collaboration with major e-commerce platforms, advertising conversion efficiency and user experience are improved.

4. Gaming Business:

   • Total gaming revenue increased by 2% QoQ in Q4, reaching 4 billion RMB for the full year.
   • Three games obtained licenses, including a Japanese card game and two domestic games.
   • By closer integration of advertising products with game distribution capabilities, more value is created for gaming partners.
   • Selective game development to reduce R&D expenses while focusing on top-quality projects.

5. Future Strategies:

   • Further localize, naturalize, and seamlessly integrate advertising into the content ecosystem.
   • Enhance advertising infrastructure, including upgrading and improving advertising products, optimizing the accuracy and efficiency of advertising algorithms.
   • Actively explore the application of generative AI in advertising material creation to support advertisers' productivity.

Outlook:

1. The company plans to further integrate advertising with the content ecosystem, optimize technical infrastructure and product supply, especially in the advertising and live broadcasting fields, to improve commercial efficiency and profitability.

2. Future focus will remain on the development of the content ecosystem, supporting creators, expanding the user base, and leveraging technological innovations such as generative AI to enhance user experience and commercial capabilities.

Financial Aspect:

Q4 Revenue:

1. Total Net Revenue: 6.3 billion RMB, a 3% increase YoY.
2. Revenue Structure:
   • Large-scale commercialization revenue accounts for 45%; advertising revenue accounts for 30%; mobile gaming revenue accounts for 16%; IP derivative products and other business revenue account for 9%.

II. Fourth Quarter Gross Profit:

1. Revenue Cost: RMB 4.7 billion, a 4% decrease YoY, driving the growth of gross profit.
2. Gross Profit: Reached RMB 1.7 billion, a 33% increase YoY.
3. Gross Margin: Exceeded 26%, an improvement from last year's 20%, expected to continue enhancing in 2024.

III. Fourth Quarter Operating Expenses:

1. Total Operating Expenses: RMB 3 billion in the fourth quarter, a 17% decrease YoY.
2. Sales and Marketing Expenses: Accounting for 18% of total revenue, decreased to RMB 1.1 billion, a drop from 21% YoY.
3. Management and Administrative Expenses: Decreased by 37% YoY to RMB 512 million.
4. Research and Development Expenses: Decreased by 11% YoY to RMB 1.3 billion.

IV. Operating Loss and Net Loss:

• Both reduced by 53% and 58% respectively YoY, with an improved adjusted net loss ratio of 9%.

V. Cash:

1. Operating Cash Flow: Generated a positive operating cash flow of RMB 640 million in the fourth quarter.
2. Cash and Equivalents: As of December 31, 2023, the total amount is RMB 15 billion (approximately USD 2.1 billion), with sufficient cash reserves to cover all remaining convertible bonds.

VI. Future Outlook:

• Expected to achieve Non-GAAP operating profit in the third quarter of 2024.

2.2, Q&A Analyst Q&A

Q: About our outlook for 2024. Could the management share thoughts and strategies on our product offerings, user growth, and commercialization?

A: Before addressing the question about 2024, I would like to briefly review our achievements in 2023. We have made significant progress in community development and commercialization. Firstly, our daily active user count has surpassed 100 million, demonstrating a sustained healthy growth trend in our community. Secondly, our advertising business has begun to accelerate, achieving a 27% annual growth rate, which should be one of the highest in the industry. The gross margin has grown for six consecutive quarters, reaching 26% in the fourth quarter, a 6-percentage-point increase YoY, and the adjusted losses have almost halved, with a 49% YoY decrease for the full year. It is worth mentioning that we achieved positive operating cash flow for the whole year.

Our community ecosystem is more aligned with commercial value, and our commercial efforts have not compromised our community development; instead, they have helped strengthen our content ecosystem. In 2023, over 3 million content creators earned income through Bilibili, further driving the development of our content creators. Additionally, over 1.8 million creators earned income through our live streaming services on Bilibili, and the number of creators earning income through advertising services nearly doubled.

Looking ahead to 2024, our focus remains consistent with 2023, with two main objectives.(1) First and foremost, we will focus on profitability, enhance our business capabilities, improve commercial efficiency, boost gross profit margins, and control costs. We expect to achieve non-GAAP net profit in the third quarter of 2024.

(2) We will continue to strengthen our content ecosystem, diversify content categories, nurture specific content genres, and ensure that Bilibili becomes the preferred platform for high-quality content. Our focus is on discovering top content creators and supporting them to increase their income. In terms of content categories, we will solidify our strengths in ACG games, technology knowledge, and other advantageous categories, while providing more support for emerging categories to meet the evolving needs of users. We believe that through these efforts, enhancing profitability will further strengthen the virtuous cycle of the community ecosystem, ensuring sustainable growth of the community and profitability.

Q: Could you introduce to us the development strategy for the business area in 2024, including live streaming, paid memberships, and other value-added services?

A: At Bilibili, we have attracted a large number of high-quality content creators, providing a welcoming space for various interests. Users feel a strong sense of belonging here, so they are willing to spend money on the content they love. User payment for the content and services they enjoy is our most natural business model. This payment experience makes users feel satisfied and happy. When content creators earn income through this service, it also enhances their sense of value and appreciation. They will be more motivated to continue creating content on Bilibili, for example, by selling exclusive premium courses to increase revenue, which is more valuable than advertising revenue.

Based on our service model and community connections, we have developed a range of value-added services, including live streaming, premium memberships, comments, audio dramas, premium courses, and fan rewards. In the fourth quarter, our overall rapid revenue increased by 22% year-on-year.

Among these services, we believe that live streaming may have the greatest potential and fastest growth. Because live streaming is more universal, anyone can become a streamer. Last year, 1.8 million content creators earned income through live streaming on Bilibili, a model that is applicable to all content creators. Bilibili's live content is very similar to the content in the PUGV community. For example, although many may think that live streaming is an impulsive or hormone-driven payment method, in reality, close to one-third of the revenue comes from our monthly membership subscription model (Da Hanghai). This payment reflects fans' long-term support and appreciation for content creators, with many paying users subscribing months in advance, and their renewal rate is very high. This example highlights our difference from traditional paid platforms, as our connection with content creators, streamers, and users is very unique and enduring.

In the fourth quarter, nearly a million streamers were active on Bilibili, most of whom are local content creators from our PUGV ecosystem. This sets us apart from other traditional live streaming platforms, as we have cultivated our own supply and demand within the PUGV ecosystem. In terms of content categories, the content categories in our PUGV ecosystem can also become our live streaming categories, especially in categories where Bilibili has unique advantages, such as virtual content creators and legal-related live streams.In 2024, our focus is on improving the quality of revenue from live streaming business to achieve sustainable and high-quality revenue growth.

Q: I noticed the strong growth momentum in your advertising business in the fourth quarter. Could you share the reasons behind this good performance and your outlook for the advertising business in 2024? What will be the main growth drivers from now on?

A: Our advertising business reached a total revenue of 6.4 billion in 2023, a year-on-year growth of 27%. In the fourth quarter, advertising revenue grew by 28% year-on-year, accounting for 30% of total revenue, an increase from 25% in the same period last year. This growth directly led to the improvement of our gross margin and gross profit. At the beginning of 2023, we put forward our own strategy and closely monitored the opportunities brought by active commercial activities within the community.

The term "horizontal" refers to the commercialization capabilities of the mid-end, including the development of our traffic strategy, algorithm capabilities, and data capabilities, while "vertical" refers to our vertical industry strategy. Our goal is to provide a better application placement experience and a higher return on investment.

We have developed ten vertical strategies targeting different industry sectors. We believe in the potential of commercial activities within the community, so we plan to connect Bilibili with e-commerce partners to a broader ecosystem through an open-loop strategy. With the advancement of the "horizontal and vertical" strategy, our advertising revenue in the first three quarters of 2023 has exceeded expectations. Now, I will share some additional highlights from the fourth quarter.

First, we were able to leverage our strengths in specific vertical areas during major events to seize the momentum of new product launches. For example, in the gaming industry, we achieved record-high revenue during the beta testing phase of some new games, such as "Star of Yuanmeng" and "Girls' Frontline"; in the e-commerce sector, we utilized video and live e-commerce capabilities during the Double 11 and New Year shopping festivals, generating remarkable results: during Double 11, the total transaction volume generated by our video and live e-commerce increased by over 250%, with a year-on-year growth of over 100%. In addition, in other vertical sectors, despite the seemingly mature baby and maternity market, we were still able to attract over 90% of new users through video and live e-commerce activities.

Second, we strengthened our advertising delivery capabilities in the fourth quarter. Our deep conversion capabilities, including providing ROI and order information within 24 hours, have gradually improved and matured. Therefore, we can more accurately achieve customers' budget goals, thereby gaining more budgets. Deep conversion type ads (high repurchase rate) contributed to over 30% of our total performance advertising revenue in the fourth quarter.

Lastly, we integrated the organizational structure and product offerings of multiple product lines. For example, we integrated the advertising platform with other advertising products, further expanding the quantity and quality of native content, enhancing the customer lifecycle and purchase cycle on our platform.The three reasons mentioned above, along with our "horizontal and vertical" strategy, are the key driving factors for the growth of our advertising revenue in the fourth quarter.

Video and live e-commerce businesses are very appealing to investors. In 2023, we will integrate commercial scenarios into the content ecosystem, influencing users from product discovery to transaction conversion. On average, over 26 million users watch related content daily, with a growth of over 200% in user interactions such as comments, related videos, and external platform redirections. This has introduced new monetization and commercialization avenues for content creators. In the fourth quarter, over 60,000 content creators participated in video and live e-commerce activities daily. During the Double 11 period, our home decor influencer "Mr. Miding" achieved a total transaction volume of over 1.6 billion RMB through Bilibili. Another example is our female content influencer "Parrot Pear," whose single video e-commerce event in December exceeded 50 million RMB in total transaction volume. In 2023, Bilibili's total transaction volume from video and live e-commerce surpassed 10 billion RMB, showcasing the commercial potential of the Bilibili community and the significant purchasing power of users through these examples.

We are optimistic about the advertising business in 2024 and confident in achieving high growth rates.

Firstly, Bilibili has the platform with the highest density of young population in China, with an average user age of 24. We believe their consumer power and purchasing ability are gradually strengthening, making us the preferred platform for advertisers to impact brands in the long term or drive short-term sales.

Secondly, we plan to further upgrade the "horizontal" strategy to enhance advertising delivery capabilities and efficiency, including intelligent multi-terminal delivery and automatic delivery to advertisers. Firstly, we will develop data visualization tools to allow clients to verify the results of their advertising placements through multidimensional data display. At the same time, we will focus on the application of AIGC technology to improve advertising efficiency. Secondly, we will delve into community scenarios, upgrade traffic strategies, and improve ad loading efficiency. For example, building on the foundation of entering multiple scenarios last year (such as story mode, PC, and OTT), we will focus on integrating these scenarios, as well as real-time pages, search functions, and other community scenarios.

At the same time, we plan to arrange advertising videos in a hybrid mode on the recommendation page and further promote native advertising to enhance our monetization efficiency. Overall, we will effectively utilize and increase ad inventory and loading volume in 2024.

Lastly, we will actively explore the model of customers as content creators, encouraging our advertising clients to create native content on Bilibili and open their own brand accounts. On the other hand, we will provide exclusive areas for these advertising clients and introduce more interactive features for them to engage with our users. Through these efforts, we aim to transform single ad placements into long-term operations and increase the brand value of our clients. Furthermore, in terms of our strategy, we believe we can replicate the successful experiences from last year in the economic and gaming sectors into other rapidly growing industries such as automotive, technology, home decor, online services, and more.In finance and education, among others. We believe that we can achieve high-speed growth in these areas as well. Finally, overall, we believe that the further development of the e-commerce ecosystem will bring more surprises to our advertising revenue in 2024.

Q: Can you provide more details on our financial outlook for 2024, including revenue, profit and loss trajectory, and cash flow chain?

A: One of our key tasks in 2024 is to improve our financial situation and achieve profitability. We plan to achieve this goal by increasing gross profit and controlling expenses. In 2023, our operating income increased by 3% year-on-year, while gross profit increased by over 40% year-on-year.

It is expected that in 2024, our operating income will accelerate, reaching a double-digit growth rate, with advertising revenue growing even faster. Gross profit will also maintain high growth as we further improve gross profit margins, especially with the increased contribution from the advertising business. In terms of expenses, we will continue to enhance operational efficiency.

It is projected that in the third quarter of 2024, we will achieve non-GAAP net profit/loss balance. In terms of cash flow, we achieved positive operating cash flow in the third and fourth quarters of 2023, especially in the fourth quarter, where we generated over 600 million RMB in operating cash flow. We expect to continue this positive development trend and maintain positive operating cash flow throughout 2024.

Regarding liabilities, we repurchased or redeemed $1.2 billion in convertible bonds last year.

As of December 31, 2023, we have approximately $2.1 billion in cash reserves, enough to cover all company debts, including $860 million in outstanding convertible bonds.

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