Bilibili: Xiaohongshu is grabbing users, will gaming become Bilibili's destiny?

The performance of XiaoPo Station in the second quarter is not bad, but it is currently considered the "dividend period" for Bilibili.US. Following the cost reduction and efficiency improvement reflected in the financial report, turning losses into profits in the next quarter seems to be a sure thing.

Specifically,

1. Accelerated Loss Reduction, Finally Making Money?: The most surprising aspect of the second quarter is the reduction in losses. After adjustment, the net loss was 270 million, 50 million less than the market expected, and the loss rate dropped to 4.4%. The reduction in losses comes from two drivers:

On one hand, the proportion of game and advertising revenue has increased, driving up the overall gross profit margin. On the other hand, the company is still downsizing, especially strategically abandoning in-house research and development personnel, leading to a decrease in salaries.

With the significant contribution of "SanMou" in the third quarter and high advertising investment in the summer game battle, Bilibili is almost certain to turn losses into profits. This is in line with the guidance given by the company in the previous quarter, and the market also expects the profit margin in the third quarter to reach 1%.

2. However, User Growth Continues to Slow Down, Weakening Long-term Prospects?: User growth in the second quarter was lower than market expectations, with actual DAU at 102 million, a year-on-year growth rate slowing to 6%. Third-party platforms have also observed the trend of Bilibili struggling with user growth. While there are differences in content formats, both Bilibili and Xiaohongshu, which attract young people, are facing direct competition. Xiaohongshu is still experiencing high growth.

Although Bilibili's short-term focus is on improving monetization, reaching the peak of traffic implies concerns about the sustainability of growth in the medium to long term. The Bilibili management has rarely mentioned the initial goal of 400 million MAU now, but how the company plans to address the continuously slowing ecological traffic is also a point of concern for the market.

3. Bilibili's Monetization Inseparable from "Games": As mentioned earlier, revenue growth in the second quarter mainly came from advertising and game revenue, but digging deeper, it is essentially benefiting from games.

Game revenue grew by 13%, with "SanMou" contributing incremental revenue even though it only contributed revenue for less than a month. In addition, the anniversary celebration of "FGO" also drove growth.

Advertising revenue grew by 29%, also heavily relying on games. This summer, nearly 100 large and small games were launched in China, and manufacturers generally start promotions 1-2 months in advance. Therefore, the second quarter also reflected revenue from new game placements. Of course, the second-quarter advertising revenue also included e-commerce ads from the 618 shopping festival, which is also significant given the e-commerce boom this year.

The logic continues in the third quarter, whether it's the full force of "SanMou" or the increased reliance on game ads due to the off-season for e-commerce ads, it is evident that Bilibili's monetization cannot do without the gaming core.

4. Pressure in the Environment, Pure Paywall Becoming Increasingly Difficult: Live streaming + premium membership subscription revenue grew by 11.5% year-on-year in the second quarter, showing a significant slowdown compared to the previous quarter and falling below market expectations.

5. More Cash on Hand: As of the end of the second quarter, Bilibili had RMB 13.9 billion in cash, deposits, and short-term investments on its books. Deducting short-term debt of RMB 4.6 billion, net cash was RMB 9.4 billion, an increase of RMB 1.4 billion compared to the first quarter. This was mainly due to improved profitability, with net cash flow from operating activities increasing by RMB 1.7 billion, an increase of RMB 1.1 billion from the first quarter.

6. Performance Indicators Overview

Dolphin's Opinion

There are no issues with the performance in the second quarter, basically following the trend of increasing revenue and reducing costs. After experiencing ups and downs for more than a year, the root cause lies in game revenue. A game like "Three Plans" confirms the effectiveness of strategic transformation. Clearly, introducing the next game after "Three Plans" is key to maintaining continuous growth in game revenue. However, in an increasingly competitive environment where high-quality content holds a higher position in channels, this is not an easy task.

However, Dolphin also mentions that it is not ruled out that there may be adjustments in guidance during the conference call or callback, which is also the main way for Chinese concept stocks to "explode" in this wave. But regardless, the second and third quarters are strong periods for Bilibili's performance. Why did market funds start to exit a month early? Although the ranking of "Three Plans" fluctuates, being among the top will still significantly drive the growth of Bilibili's revenue.

Dolphin believes that the fluctuation in Bilibili's market value is mainly due to the market's lack of confidence in its long-term growth and profit margin targets. After all, macro pressures are visible to the naked eye, but Bilibili has not yet achieved stable profitability. Will the rhythm be disrupted due to environmental pressures in the future? For the market, there is no rush to eat the long-term cake now.

Therefore, compared to other Chinese concept stocks, funds may give some valuation premium to Bilibili due to its strong short-term fundamentals, but they are also unwilling to give too much. More focus is on marginal changes and valuation ranges for short-term trading. This is also the advice Dolphin gave in the previous quarter's financial report review:

Currently, a market value of $5.9 billion corresponds to a 25-year Non-GAAP net profit of 30x, higher than other Chinese concept peers (generally 10x-20x). Even if Bilibili is still in the turning point cycle from loss to profit over 25 years (a profit margin level of 4-5% is also probably not the long-term stable profit margin for Bilibili), this has led to a "superficially" high short-term valuation for Bilibili.

If Bilibili can achieve a profit margin level of over 10% in the long term, the current market value of $5.9 billion implies a 25-year P/E ratio of less than 15x, basically aligning with other similarly struggling Chinese concept peers at present, making Bilibili more cost-effective. However, whether Bilibili can achieve a 10% profit margin is at least 25 years away. The current macro environment pressure has increased long-term uncertainty, making it difficult to attract long-term capital. After considering more risk factors and comparing valuations with Chinese peers, it is indeed challenging to attract long-term funds at the moment.

Detailed Analysis Below:

I. Steady User Acquisition, Slight Increase in User Stickiness

User growth slowed further in the second quarter, with DAU/MAU stickiness remaining flat compared to the previous quarter, performing below market expectations.

Specific user data:

1. In the second quarter, Bilibili's overall monthly active users (App, PC, TV, etc.) reached 338 million, a year-on-year growth of 3.7%, with a seasonal net loss of 5.5 million users.

2. Stickiness of existing users remained unchanged, with DAU/MAU at 30%. The average daily user duration was 99 minutes, naturally decreasing in the off-season but increasing by 5 minutes year-on-year. In the second quarter, DAU was 102.3 million, with a net loss of 100,000 compared to the previous quarter.

The user slowdown is mainly due to competition. Combining data from Questmobile, in the "social platforms where users are still growing," Bilibili's performance is only better than Kuaishou. In the peak summer season of July, total user duration has already shown negative growth.

II. E-commerce and Gaming Fierce Competition, Bilibili Benefits

In the second quarter, Bilibili's advertising revenue reached 2.04 billion, a year-on-year growth of 29.5%, exceeding market expectations. This was mainly due to the continued internal competition during the 618 e-commerce peak season, the preheating of new games in the summer, and an increase in educational supply.

Currently, Bilibili's commercialization is still in the early to middle stage, so its growth rate is significantly higher than the industry average. It also has the highest advertising growth rate among listed entertainment platforms. Dolphin believes that the short-term strong commercialization of Bilibili, or the reason why the platform's low conversion rate of advertising inventory is still attractive, is due to its unique positioning and the "fisherman" dividend in the fiercely competitive gaming and e-commerce industries.

Of course, Bilibili is also working to improve advertising conversion rates, upgrading its delivery system, and is currently testing a fully managed delivery model, which is expected to attract more advertisers' budgets. In the first half of the year, the number of Bilibili's advertising clients increased by 50% year-on-year. Among them, the number of advertisers in internet services and education increased by over 100% year-on-year.

However, given the continuous macro pressure, after a stronger third quarter, although the fourth quarter includes events like Double 11 e-commerce festival, the budgets of businesses may be affected. With limited marketing budgets, e-commerce platforms closer to the payment process and with higher conversion rates are preferred by businesses.

Currently, Bilibili's public domain recommended pool ad loading rate is still around 7-8%, with room for improvement compared to other platforms with loading rates of over 10%. However, for users, both public domain ads and private domain ads from influencers are still ads, and seeing too many ads leads to a poor user experience.

Simply trying to fill ads forcefully to match the over 10% loading rate of other platforms may affect user experience. Douyin's loading rate is no longer increasing, while Video Number's loading rate is currently below 5%, but Tencent is already considering user experience.

Therefore, simply increasing ad inventory is not a long-term solution. The key is to improve ad conversion ROI through more accurate recommendation algorithms and achieve more effective pricing. This is an area where Bilibili has been relatively lacking. During the Investor Day, the company claimed that AI has had some effect on precise ad content recommendations, which is worth continuing to monitor.

III. Strategic adjustments are beginning to show results, waiting for the next "Sanmou"

At the end of the second quarter, "Three Kingdoms: Strategy Conquest" was released, although it could only contribute 20 days of revenue to the second quarter performance, the growth momentum was already sufficient. At the same time, the afterglow of "FGO" anniversary celebration continued into the second quarter, "Honkai Impact" maintained stable revenue, providing considerable support to the second quarter game revenue.

Ultimately, game revenue increased by 13% year-on-year, exceeding the "high single-digit" growth rate guidance. Deferred revenue increased significantly by 25% month-on-month, reflecting the excellent performance of "Sanmou".

One "Sanmou" ensures Bilibili's worry-free game growth from this year to the first half of next year. However, considering that "Sanmou" is ultimately a heavy-spending, heavy-vertical SLG game, the norm for such games is high revenue at the beginning and lower later on. Therefore, sustainability is still an unavoidable topic. In early August, the second season of "Sanmou" started, with some loss of active users compared to the first season, and a faster decline in revenue, indicating some issues

Bilibili has cut its self-developed games and instead chosen to exclusively represent some high-quality games that fit the preferences of Bilibili users. At least from the success of "Three Kingdoms" (guaranteed revenue, low customer acquisition cost), it proves that the strategic transformation is effective. Therefore, timely introducing the next game after "Three Kingdoms" is key to maintaining continuous growth in game revenue. Currently, there is no indication in the pipeline, so pay attention to whether there are updates on the game pipeline during the conference call.

IV. Difficult Environment, Pure Paywall Becoming Increasingly Challenging

In the second quarter, value-added services grew by 11.5% year-on-year, with growth further slowing down significantly. Dolphin believes that the slowdown in growth may mainly be due to the poor performance of the live broadcast awards, which is quite in line with the performance of peers.

The premium members also face competition from other long video platforms, with little change in the quarter, adding a net of 400,000 paying members in the second quarter. However, compared to other long video platforms, Bilibili mainly introduces proven high-quality historical film and television content, as well as a small amount of self-made variety content that fits the platform's discussion topics (easier to attract attention).

Therefore, although the number of paying users is far behind iQIYI, Bilibili's profit pressure may also be relatively smaller. Currently, the payment rate of premium members is still low, and with more high-quality content that is differentiated from iQIYI being introduced, the payment rate is expected to continue to increase.

The "pay-per-view videos" and "charging" in the private domain payment by Bilibili's Up owners are new monetization methods in the past year. Recently, Bilibili's Investor Day also mentioned that the revenue from Up owners' fan subscription payments increased by 371% year-on-year and is expected to become the main growth driver of value-added services in the coming years.

V. Open Source + Cost Reduction, Bilibili's Profitability is Imminent

In the second quarter, Bilibili adjusted its net loss to 270 million, with a loss rate of 4.4%, showing a significant improvement compared to the previous quarter. The reduction in losses comes from two drivers:

(1) On the one hand, the proportion of game and advertising revenue has increased, driving up the overall gross profit margin.

It is worth mentioning that the absolute value of revenue sharing costs has increased again on a month-on-month basis. Dolphin predicts that this may be mainly due to the high revenue sharing from games and Up owners' fireworks advertisements (Bilibili only takes 5%, and the remaining 95% goes to the Up owners).

(2) On the other hand, the company is still downsizing, especially strategically abandoning in-house research and development personnel resulting in a decrease in R&D employee compensation (R&D SBC expenses decreased by 23% year-on-year).

Although marketing expenses increased year-on-year due to the launch of "Sanmou", in the third quarter, with the significant contribution of "Sanmou" to most of the revenue and high advertising spending during the summer game battle, Bilibili almost turned losses into profits, as expected by the market based on the guidance given by the company in the previous quarter, with an expected profit margin of 1% in the third quarter.

Historical articles from Dolphin Research on "Bilibili":

Earnings season (showing the past year)

May 25, 2024 conference call "Bilibili: Confident in this year's high advertising growth (1Q24 conference call summary)"

May 24, 2024 earnings review "Crazy plummet, what did Bilibili do wrong again?"

March 8, 2024 conference call "Bilibili: Confident in high advertising growth (4Q23 conference call summary)"

March 7, 2024 earnings review "Bilibili: Facing reality, self-reliance in in-house development"

November 30, 2023 conference call "Gaming executes differentiated strategies (Bilibili 3Q23 conference call summary)"

November 29, 2023 earnings review "Bilibili: Confidence in being better than the trash king, confidence is being worn out" 2023 August 17th Conference Call "Confident in Continued High Growth in Live Streaming and Advertising (Bilibili 2Q23 Performance Conference Call)" link"

2023 August 17th Financial Report Review "Bilibili: Can Advertising Save the Small Broken Station? Not That Easy!" link"

2023 June 1st Conference Call "Bilibili Management: Many Misunderstandings from the Market Towards Us (1Q23 Conference Call Summary)" link"

2023 June 1st Financial Report Review "Bilibili: The 'Not Growing' Small Broken Station" link"

2023 March 3rd Conference Call "Costs Decrease Absolutely This Year, New Games to be Launched Intensively in the Second Quarter (Bilibili Conference Call Summary)" link"

2023 March 3rd Financial Report Review "Bilibili Needs a 'iQIYI-style' Blood Transfusion" link"

2022 November 29th Conference Call "Bilibili: Will Not Easily Do Patch Ads, Firmly Focus on Gaming as the Company's Main Business (3Q22 Conference Call Summary)" link"

2022 November 29th Financial Report Review "Bilibili's Operational Turning Point Approaching? Still Need to Take Drastic Measures to Break Doubts" link"

2022 September 9th Conference Call "Bilibili: Emphasizing the Importance of Commercialization in Line with Ecological Community Development (2Q22 Conference Call Summary)" link"

2022 September 8th Financial Report Review "Internal Concerns Plus External Challenges, Bilibili Suffers from 'Heart Disease' Difficult to Cure" link" June 9, 2022 Conference Call "Bilibili: Ecological Operation Turning Positive, Reduction in Losses Expected to Show in the Third Quarter (Conference Call Summary)"

June 9, 2022 Financial Report Review "Bilibili's Carnival Is Coming to an End?"

March 4, 2022 Conference Call "Bilibili's 'Want It All' Strategy: Advertising, Revenue Growth, User Increase, and Cost Reduction"

March 3, 2022 Financial Report Review "Can Bilibili Maintain Its Growth Despite Challenges? Faith in Rui Di"

In-depth

January 6, 2023 "Entertainment Industry's Strong Start, Tencent vs. Bilibili: Whose Rebound Will Be More Sustainable?"

June 15, 2022 "Both Suffering Losses, Which Platform Can Recover: Kuaishou or Bilibili?"

March 22, 2021 "Losing Value While Remarrying, Is Bilibili a Trap or an Opportunity?"

March 12, 2021 "Dolphin Research | Bilibili Series II: Can Bilibili Sustain Without Ads?"

March 9, 2021 "Dolphin Research | How Far Is Bilibili from Rui Di's 400 Million User Goal?"

Hot Topics

December 14, 2021 "After the Celebration Ends, Is Bilibili Returning to a Small Platform? Need for 'Ads'!"

July 27, 2021 "Bilibili, a Social Platform in the Z Era, Still Maintains Exclusivity"

Risk Disclosure and Disclaimer for this Article: Dolphin Research Disclaimer and General Disclosure