Bilibili: It's all the fault of high expectations; the small station isn't actually that bad

$Bilibili(BILI.US) The actual performance in the third quarter is quite good, but the recent high market expectations need some adjustment. Compared to the latest expectations, the game revenue fell short, leading to average performance in revenue and profit-related indicators.

Specifically:

1. The shoe has dropped, and the small station is making money: The adjusted net profit in the third quarter was 236 million, with a profit margin of 3.2%. The reduction in losses was driven by high growth in games and advertising, while the main factor was the decline in server depreciation costs. After a cycle, the SBC expenses for R&D personnel have begun to recover.

2. Gradual increase in traffic, enhanced stickiness: The growth rate of monthly active users continued to slow down in the third quarter, falling short of expectations. According to APP data from third-party platforms, Xiaohongshu is rapidly catching up. However, for existing users, the stickiness of using Bilibili continues to improve.

On one hand, DAU/MAU has increased, and on the other hand, the average daily duration and monthly average interactions per user have further improved. From the perspective of average user traffic monetization and retention costs, the trend in the third quarter has also become healthier. While the average retention cost has decreased quarter-on-quarter, the monetization value has increased.

3. "Three Strategies" is indispensable: Game revenue achieved a high growth of 84% in the third quarter, with "Three Kingdoms: Strategy of the World," launched in June, being the main contributor. According to estimates from Dolphin 君 based on third-party platform data, the expected revenue for Q3 from "Three Strategies" is 1.5 billion, with an estimated 1 billion recognized in the current period based on the usual recognition cycle. If this 1 billion is excluded, other older games are still experiencing a year-on-year decline.

4. Sustained high growth in advertising: Advertising revenue in the third quarter increased by 27.8% year-on-year, continuing to show robust growth. In addition to benefiting unexpectedly from the chaos in games and e-commerce, Bilibili is also making efforts: this year, the upgrade of the advertising system has improved the accuracy of algorithm recommendations, and new user acquisition tools have been launched for content creators, helping Bilibili to gain a share from the sales generated by content creators.

Otherwise, according to the established rule that only 5% of the fireworks advertising revenue goes to the platform, building the fireworks platform would be akin to charity for Bilibili. In the eyes of advertisers, Bilibili, with its high private domain attributes, still has the most valuable advertising slots in the videos produced by content creators.

5. Pressure from pure subscriptions gradually emerges: Revenue from live streaming and premium memberships grew by 8.7% year-on-year in the third quarter, but continued to slow down quarter-on-quarter. Dolphin 君 believes that the slowdown in growth is partly due to poor performance in live streaming rewards, which aligns with industry trends. On the other hand, premium memberships are also facing competition from other long video platforms, with the first instance of user loss (quarter-on-quarter decline) occurring in the third quarter. Additionally, the private paid content launched by Bilibili content creators in the past two years (such as charging and paid gift incentives) is also expected to face some environmental pressures5. Significant Improvement in Cash Flow: Games are generally good at generating cash flow, so with the support of "Three Strategies" in the third quarter, Bilibili's cash, deposits, and short-term investments increased to RMB 15.2 billion. After deducting short-term debts of RMB 4.3 billion, the net cash reached RMB 10.9 billion, an increase of RMB 1.6 billion compared to the first quarter. Thanks to the improvement in profitability, the net cash inflow from operating activities was RMB 2.2 billion, an increase of RMB 500 million compared to the second quarter.

7. Performance Indicators Overview

Dolphin's Viewpoint

The strong market performance of Bilibili's third-quarter results has been fully anticipated, and with the ability to track game revenue through third-party platforms, market expectations for games have been rising over the past month.

Although there were no surprises compared to the latest expectations, the performance of "Three Strategies" was indeed good. As a niche game with many similar titles in the market and high user spending, it managed to maintain revenue scale through seasonal operations in the third quarter, despite increasing macroeconomic pressures, which is significantly better than Dolphin's earliest expectations.

For the next quarter, Dolphin believes that due to the Double 11 peak season, advertising is expected to continue its high growth. Therefore, game performance will be key to whether the results can continue to improve. From the perspective of deferred revenue, deferred revenue in the third quarter increased by 10% quarter-on-quarter and continued to grow significantly year-on-year, indicating that the revenue for the current quarter is expected to accelerate significantly due to last year's low base, suggesting that Q4's game performance is likely to remain strong.

Looking at the expense side, since Bilibili's main issue is monetization and its expense outlay is not particularly high, cost control and efficiency improvements are mainly reflected in R&D expenditures, specifically by extending usage cycles and reusing resources to reduce server depreciation costs. However, other expenses, such as sales expenses, have seen a significant increase due to the promotion of new games, while management expenses and R&D personnel expenditures have begun to end the optimization cycle and start expanding.

The issue of expense expansion, while it will have a considerable impact on financial metrics for Bilibili, which has just turned profitable, is not a core factor affecting valuation from a valuation logic perspective. In the short term, after high expectations undergo some adjustments, the high revenue from the new season of "Three Strategies" is expected to continue, and with market sentiment recovering, it is possible that valuations will rise again.

However, after Q1 next year, the unavoidable medium- to long-term growth issues will be brought up for repeated discussion. As traffic gradually peaks, advertising growth will be somewhat affected. Moreover, relying solely on "Three Strategies" is not sustainable; it will be relatively difficult for SLG and other niche games to become evergreen titles. However, at present, there are no indications in Bilibili's announced pipeline of a potential next blockbuster like "Three Strategies," so providing a clearer growth blueprint will be key for management in this conference call.

The following is a detailed analysis

I. Traffic gradually peaks, but stickiness increases

User growth further slowed in the third quarter, with user stickiness DAU/MAU showing a significant increase. With the aggressive competition from Douyin and Xiaohongshu, the gradual peak of traffic is a challenge that Bilibili must face.

Specific user data:

1. In the third quarter, Bilibili's overall monthly active users (App, PC, TV, etc.) reached 348 million, a year-on-year increase of 2%, with a net increase of 12 million compared to the previous quarter, driven by the summer peak season.

2. The stickiness of existing users improved slightly compared to the previous quarter, with DAU reaching 107 million in the third quarter and DAU/MAU reaching 30.8%. The average daily user duration reached 106 minutes, hitting a historical high due to the peak season. In addition, the average interaction volume per user (likes/comments/saves) has also been continuously increasing.

The slowdown in user growth can mainly be attributed to competition. According to data from Sensor Tower, Xiaohongshu is close to catching up with Bilibili, but Xiaohongshu's DAU is actually higher than Bilibili's, indicating that Xiaohongshu has stronger stickiness. Furthermore, Xiaohongshu, which has a higher proportion of female users, is perceived to have better monetization value in the eyes of merchants compared to Bilibili, which has a slightly higher proportion of male users.

II. High growth in advertising is sustainable in the short term

In the third quarter, Bilibili's advertising revenue reached 2.09 billion, a year-on-year increase of 27.8%. The high growth is mainly benefited from the chaotic summer gaming season, the intense competition in e-commerce, and the increase in advertising spending from industries such as AI and education and training that are experiencing short-term prosperity.

In addition, this year Bilibili upgraded its advertising system, improving the accuracy of algorithm recommendations, and launched a fully managed advertising service to attract more marketing budgets from small and medium-sized merchants. Furthermore, it introduced a new user acquisition tool aimed at content creators, helping Bilibili to share in the profits from the sales generated by these creators.

Otherwise, according to the established rule that only 5% of the advertising revenue from Huohuo is allocated to the platform, building the Huohuo platform would be tantamount to charity for Bilibili. In the eyes of advertisers, Bilibili, which has a high private domain attribute, still has the most valuable advertising space in the videos produced by content creators

III. Game turnaround, "Three Strategies" is indispensable

In the third quarter, game revenue achieved a high growth of 84%, with "Three Kingdoms: Strategizing the World," launched in June, being the main contributor. According to estimates from Dolphin Jun based on third-party platform data, Q3 revenue from "Three Strategies" is expected to be 1.5 billion, and based on the usual recognition cycle, it is anticipated that 1 billion will be recognized in the current period. However, if this 1 billion is excluded, other older games are still experiencing a year-on-year decline.

Bilibili has cut back on self-developed games and instead chosen to exclusively 代理 some high-quality games that align with Bilibili users' preferences. At least from the success of "Three Strategies" (with guaranteed revenue, low customer acquisition costs, low overall channel sharing, and strong reductions in development sharing for developers), it confirms that the strategic transformation is effective. Considering that "Three Strategies" is ultimately a heavily monetized, niche SLG game, the pattern of high revenue followed by low revenue is common for this type of game, so sustainability remains an unavoidable topic.

From the perspective of deferred revenue, the short-term high growth of "Three Strategies" is expected to continue, but whether there will be new contributions from new "Three Strategies" after the base period in the second half of next year is key. However, from the currently announced pipeline, nothing has been seen yet, so it is worth paying attention to whether there are any updates from management during the conference call.

IV. Pressure from pure paid value-added services gradually emerges

Live streaming + premium membership subscription revenue grew by 8.7% year-on-year in the third quarter, continuing to slow down on a quarter-on-quarter basis. Dolphin Jun believes that the slowdown in growth is partly due to poor performance in live streaming rewards, which aligns with industry trends. On the other hand, premium memberships also face competition from other long-video platforms, with the first instance of user loss (quarter-on-quarter decline) occurring in the third quarter. Additionally, the paid content from Bilibili creators launched in the past two years (paid videos, charging, and other paid gift incentives) is also expected to face some environmental pressures.

However, compared to other long video platforms, Bilibili mainly introduces high-quality historical film and television content that has been proven to be excellent, along with a small amount of self-produced variety shows that align with trending discussion topics on the platform (which are easier to attract attention).

Therefore, although the scale of paying users is significantly lower than that of iQIYI, Youku, and Tencent Video, Bilibili's profit pressure may also be relatively smaller. Currently, the payment rate for premium members is still low at 6.3%, which is significantly lower than the 20-25% of iQIYI, Youku, and Tencent Video. As more differentiated high-quality content is introduced, the payment rate is expected to continue to rise.

V. The shoe has dropped, and the small station is making money

In the third quarter, Bilibili achieved an adjusted net profit of 236 million, although the profit margin is still low at only 3.2%. However, turning a profit is a good start, and a closer look reveals that the reduction in losses comes from two drivers:

(1) On one hand, the proportion of revenue from games and advertising has increased, driving the overall gross margin up to 35%, surpassing the historical periods where the majority of revenue came from games.

The absolute value of revenue sharing costs has rebounded, and Dolphin Jun estimates that this may mainly come from high revenue sharing in game distributions and Up advertising (Bilibili only takes 5%, leaving 95% for Up).

(2) On the other hand, the decline in server depreciation costs has contributed, while after a cycle, the SBC costs for R&D personnel have begun to recover.

In terms of other expenses, the third quarter mainly reflects a significant increase in promotional expenses for games.

However, from the perspective of the traffic monetization/cost relationship that Dolphin Jun has been observing, overall in the third quarter, the value that can be extracted from a single user has increased, indicating that the platform's monetization efficiency is improving