Bilibili needs a "iQiyi-style" transformation

On March 2nd, Beijing Time, after-hours of Hong Kong stocks, $Barnes(B.US)ilibili.US (BILI.O/9626.HK) released its Q4 2022 performance.

Key points:

1. Annual guidance is conservatively biased: Monetization is currently BiliBili’s core issue, and the company's revenue guidance for 2023 is weaker than the market's expectations with only a 14% YoY growth.

Keep in mind that this year not only has expectations for macroeconomic repair, Story Mode of BiliBili is also expected to shine in a period when advertisers' budgets are significantly relaxed. However, it seems that the management's outlook is very cautious, and more explanations will be provided during the later conference call.

2. Loss reduction is proceeding slowly: Due to the slow execution of cost reduction and efficiency improvement, the reduction effect reflected in Q4 was not significant enough. The gross profit margin has improved as expected, which may be related to the adjustment of the content revenue-sharing ratio.

Expenses include one-time expenses such as layoffs compensation and termination of some game projects. After adding back, all three expense ratios have improved, but except for the sales expense, the R&D and management expense ratios are still higher than the previous year.

Currently, BiliBili's team optimization is still ongoing, and it is expected that the effect of loss reduction this year will be more significant.

2. Fewer customer acquisitions, slower user growth: Management proposed last quarter that the dual goal of achieving user growth and loss reduction will be balanced in 2023, implying that investment should not be made blindly for user growth. Therefore, there are some concerns in the market about the achievement of the target of 400 million users.

In Q4, with a significant YoY drop in customer acquisition marketing expenses, user growth slowed down, losing 6.6 million users QoQ. However, the user stickiness has significantly increased, and the DAU has accelerated instead. According to the communication from the management last quarter, this should be somewhat related to the improvement in the Story Mode penetration rate.

3. Daily active users are increasing, but advertising monetization is still challenging: Generally, with the growth of daily active users, the expansion of advertising inventory will naturally attract business advertising budgets. However, BiliBili's Q4 advertising revenue decreased by 5% YoY. Although there is pressure from macroeconomic environment, this level is obviously too weak for low base, early realization of Story Mode.

4. Games suffer from supply shortages, relying on others first than relying on themselves: There are few new games in Bilibili in Q4, and the feedback was mediocre, limited in enhancing game growth, with a 12% YoY drop.

Since the end of last year, Bilibili has implemented a major personnel adjustment to the game department-optimizing the old team and purchasing new studios, focusing on improving the ability to develop premium self-produced products and the speed of product output.

But Dolphin Analyst scrutinized the reserve game's quality and believes that in the short term, revenue still needs to rely on excellent peers for technology cooperation, like MiHoYo’s “Honkai: Star Rail”.

5. Direct payment from C-end is not bad: The paid-for business for C-end loyal users, such as live broadcasts, big members, and self-operated e-commerce, has been growing steadily for several quarters, except for occasional impacts from the epidemic. Particularly, the value-added of live broadcasts has been optimized a lot in commercialization, and the effect is still quite noticeable. 6. Learning from the incident of iQiyi, let's take a look at Bilibili's cash flow:

As of the end of last year, Bilibili had a total of 19.6 billion yuan in cash, deposits, and investments, a decrease of more than 4 billion yuan from the previous period. It is mainly used for main business operations, investments, and early redemption of some convertible bonds.

However, there is still 6.6 billion yuan in short-term loans due within one year, as well as 8.7 billion yuan in long-term debt.

At the beginning of the year, Bilibili raised $400 million through ADS offering, mainly because a convertible bond of nearly $800 million may need to be redeemed compulsorily in June this year. Excluding long-term debt, the net cash available for operating activities of Bilibili is currently about 10 billion yuan. However, a convertible bond of $800 million may also face compulsory redemption in December 2024. Based on the current operating expenses (Q4 non-GAAP operating losses of 2.1 billion yuan, cash flow situation not disclosed), and future improvement trends, the original profit target (non-GAAP net profit turning positive by 2024) may need to be advanced. Otherwise, in order to cope with different development situations (stalled game development and slow commercialization), there may be possibilities for financing through additional offerings.

Dolphin Analyst's View

To summarize the fourth quarter performance in one sentence: the realization is still weak, and the revenue guidance for this year is lower than market expectations. Under the expectation of industry recovery, it has not shown higher growth than its peers.

The user indicators show that the penetration rate of Story Mode continues to increase, but commercialization still seems to be slow and more difficult than imagined. Although some one-time costs were incurred due to layoffs and the discontinuation of some game projects, the R&D costs still increased by 35% year-on-year after adding back these costs. It is understandable that the current profitability was ruined by merging external studios, but what about the output ability of these studios' subsequent games?

Of course, compared with the extravagant expenditure of Kuaishou, Bilibili's biggest problem is still on the monetization end. Dolphin has no intention of giving high expectations to Bilibili's current self-developed reserve of games. Instead, it hopes to bet on the explosive hits of the joint operation games, which is more like seeing how the wind blows. Can Story Mode show the commercialization level of its peers?

Last year, the management basically blamed the "complex macro environment" and "short video competition" for the problems. However, Dolphin believes that Bilibili's own management issues are bigger, which can be summarized as "big ambition, not enough internal strength, and self-restraint."

(1) Bilibili has a wide range of businesses, which can be regarded as a mini version of the entertainment ecosystem, with mainstream monetization models such as games, advertising, live streaming, and long videos. However, the experience of its peers has also proved that, except for games and advertisements, other businesses have naturally low gross profit margins and are extremely difficult to handle. (2) The high gross profit margin of games and advertising support the past and future valuations of Bilibili respectively, but not doing sponsorships is like forcing Bilibili, a beginner player, to choose Hard Mode in the case of weak game development and algorithm recommendation levels.

All of the above problems point to the team's strategic and execution abilities. Of course, this year's industry beta repairs can improve Bilibili's predicament, such as advertising and games. But in order to achieve a thorough reversal of Alpha and considering the potentially precarious cash flow situation, Bilibili cannot afford to drag its feet on the road to reducing losses. Referring to iQiyi's road to reversal, changing blood (organizational adjustment) + subtraction (focus) may be a faster solution.

How will management refine the profit progress for the next 1-2 years? What are the growth guidelines for different businesses? It is recommended to pay attention to the upcoming conference call. Dolphin Analyst will release the details in realtime to the investment research group and the Longbridge app. Please feel free to add the assistant WeChat "dolphinR123" for further assistance.

Detailed interpretation of this season's financial report

1. User scale: Growth slowdown

Amidst disappointing performance time and time again, high-growth user scale is almost the only "growth attribute" tag that Bilibili can maintain for itself in times of economic headwinds. But since last quarter, when the company announced that it would pay more attention to pursuing user quality under the demand for reducing losses, the market has become somewhat concerned about whether the "goal of reaching 400 million users by the end of 2023" can be achieved as scheduled.

In the fourth quarter, Bilibili lost 6.6 million users compared to the previous quarter, with a total of 326 million monthly users (including App, PC, TV, etc.), a year-on-year growth of 20%, which can be said to be lower than expected for the first time.

1. User interaction: Story Mode brings power, leading to an increase in user stickiness

The indicator of user stickiness, DAU/MAU, has increased to 28.5%, with an average daily user time of 96 minutes. The increase in activity of existing users should be related to the penetration rate of Story Mode. Last quarter, half of the Up Masters who reached 100,000 fans relied on Story Mode content.

2. User payment: Strong live streaming, increase in payment rate compared to the previous quarter

In the fourth quarter, the number of paid users reached 28.1 million, a decrease of 400,000 compared to the previous quarter. However, due to the company's improvement in live streaming commercialization, the payment penetration rate stabilized the downward trend and remained at 8.6%. Bilibili's paid user statistics include game payments (Bilibili's self-developed or exclusive games), live streaming payments, and premium members (mobile and TV members).

In the fourth quarter there were 21.4 million paying users, driven by popular content such as "The Three-Body Problem," with an increase of 1 million compared to the previous quarter.

In the fourth quarter, ARPU (average revenue per user) was 42 yuan per person per month, down 4.5% year on year, and still showing a downward trend, which is similar to the overall trend of the paid content industry. In addition, the reason for the structural decline in high-paying games is due to insufficient supply. The final recovery of payment consumption power still depends on the macro economy and the content supply of the platform itself.

3. Ecological Balance: The Impact of the Epidemic on Uploading Material by Dolphin Analysts

Since the adjustment of the incentive rules at the beginning of the year, the growth of Dolphin Analysts has been under pressure this year. In the fourth quarter, Dolphin Analysts barely maintained its activity at 3.8 million people.

Currently, nearly half of the Dolphin Analysts on the platform have earned income, but most of the long-tail Dolphin Analysts still rely mainly on incentive rewards from the platform. After adjusting the incentive rules, Dolphin Analysts' income will be discounted, and their creative motivation will also be weakened.

In the non-holiday fourth quarter, combined with the nationwide epidemic affecting the collection of outdoor material by Dolphin Analysts, the number of Dolphin Analysts and uploads did not maintain growth.

On the other hand, user engagement remained high in the off-season, with an average of 42 videos per user per day. The increase in quantity mainly depends on the increased penetration rate of Story Mode.

2. Full-Year Revenue Guidance Falls Short of Expectations

In the fourth quarter, Bilibili achieved net revenue of RMB 6.14 billion, a year-on-year increase of 6.3%, which basically met guidance and market expectations. However, the guidance for the full year of 2023 is between RMB 24 billion and RMB 26 billion, with a median year-on-year growth rate of only 14%. This growth rate level is below current Bilibili market expectations. The development status shown on the traffic of the station is completely inconsistent.

The market is expecting a growth of over 20% with a total of 26.5 billion, but whether the management deliberately kept it conservative or cashing out is actually difficult remains to be seen. It may be necessary to listen to how the management will explain during the conference call.

There is also an overall expectation of recovery for the first quarter. Especially for games and advertisements that were dragging during this quarter, the market expects that games can stop declining, and ads can grow by more than 20%.

The market has such expectations due to hopes that Bilibili's "The Three Body Problem," "Chinese Myths," and other content can bring higher traffic growth and advertising sponsorships. As well as the repair brought by popular mobile games (MiHoYo's "Honkai Impact 3") from joint operation.

Although several new games were launched in the fourth quarter, such as "Jewelry Enhancement Story: Ian Stone", "Non-anonymous Command", "Warm Snow", they all performed poorly and are not large-scale. Therefore, in the short term, games still need to rely on joint operation to gamble on popular games.

Since the fourth quarter of last year, the issuance of game licenses has become more normalized. Both large and small factories have obtained some licenses, and big factories have also broken through the rumors of review restrictions. However, under the trend of easing supervision, Bilibili has only landed one game license since the fourth quarter of last year. This may be attributed to Bilibili's own R&D capabilities, and its development progress and grasp of content approval for the license are still insufficient.

3. Divisional Business Situation

1. Advertising: Guzzling inventory is still difficult to withstand macroscopic pressures?

In the fourth quarter, Bilibili's advertising revenue was 1.512 billion yuan, a year-on-year decrease of 4.7%. After the recovery in the previous quarter fell short of expectations, Bilibili's performance was apparently worse than its peers after releasing the inventory of Story Mode, and this may be the problem of the commercial team itself.

2. Gaming: Poor revenue from new products, still relying on joint efforts in the short term

In the fourth quarter, Bilibili's gaming revenue was 1.146 billion yuan, a year-on-year decrease of 12%, mainly due to weak supply.

The Dolphin analyst believes that from the performance of new games launched in the fourth quarter and the reserve of games with licenses in the short term, whether they are self-owned or independently developed, they are not enough to support significant growth in gaming revenue. In the first half of the year, MiHoYo's "Honkai Impact 3" is expected to go online, and Bilibili, as the joint operator, may alleviate some pressure.

3. Live streaming and big members: Exploring payment points, steadily promoting commercialization

In the fourth quarter, the value-added revenue of live streaming was CNY 2.35 billion yuan, a year-on-year increase of 24%, and it was the most stable among all sources of revenue. From the changes in the number of big members, it is speculated that this is mainly driven by live streaming revenue. Although the live entertainment industry is in a sunset phase, Bilibili's penetration is still at an early stage, so the growth rate is not bad. In addition, the team has been constantly exploring payment points to enhance commercialization.

In addition, Bilibili actively launched the function of live streaming e-commerce in October last year in order to expand the live streaming ecosystem. However, compared with other platforms wanting to create an e-commerce closed loop, Bilibili's management has self-awareness and does not go for e-commerce infrastructure, but, instead, focuses on strengthening user stickiness on the platform and further excavating user value.

Regarding big members, it mainly depends on the current content schedule. Compared with other long videos, Bilibili has advantages mainly in the second-dimensional (2D) content. In the fourth quarter, the performance was not good, with 21.40 million paying users, an increase of 1 million from the previous month. The broadcasting of "The Three-Body Problem" on December 10th received high attention and should have made a significant contribution.

4. E-commerce and others: Exceeding expectations in growth mainly comes from the transfer of esports copyright revenue

Bilibili's self-operated e-commerce mainly relies on loyal fans and core second-dimensional users. The prices of individual products are relatively high, so it is difficult to expand in scale before broadening the product categories. Also, under the influence of economic downturn, users' purchasing power is affected, so there is also pressure for growth.

The fourth quarter was during the pandemic, and logistics were restricted, which affected the sales and delivery of products. However, the growth of the overall business increased by 13% due to the increase in revenue from the transfer of esports copyrights.

IV. After eliminating one-time expenses, the reduction in losses is still slow

Revenue sharing costs account for about 30% of the total expenditure of B station's cost expenses. The next highest are content acquisition costs, server bandwidth costs, and R&D staff salaries. The decline in their share of revenue requires the realization of expanded release at the monetizing end.

In the fourth quarter, the year-on-year increase in operating costs was 4%, significantly slower than the previous three quarters. This was mainly due to the reduction in server bandwidth and personnel expenses. The overall gross profit margin improved by 2 percentage points quarter-on-quarter. However, after full communication with the management in the previous quarter, it was already within market expectations.

The fourth-quarter cost incurred one-time effects from severance compensation and termination of gaming projects (about 670 million yuan), an increase of 16% year-on-year. After elimination, it actually decreased. Among the three expenses, sales expenses decreased by 30% year-on-year, which undoubtedly affected user growth. However, R&D expenses are still increasing, and after eliminating one-time expenses, they still increased by 35% year-on-year, mainly reflecting the personnel expenses of external work studios' integration.

Some quarter-on-quarter optimizations are expected in the next quarter, but relying solely on cost reduction is not the fundamental solution. From the perspective of B station's current platform development stage and revenue structure, "open source" is still more important than "thrift".

Finally, Non-GAAP operating loss was 2.1 billion yuan, and the loss rate was 34%. The actual loss after eliminating one-time effects was 1.3 billion yuan, a decrease of 21% in the short term. However, from the perspective of B station's own operation, cash flow situation, and market expectations, it needs to be accelerated.

Dolphin's "B Station" Historical Articles:

Financial Report Season (Showing the past year)

November 29, 2022 Telephone Conference Call: "[B Station: We're Firm on Gaming as Our Main Business (3Q22 Conference Call Minutes)"] (https://longbridgeapp.com/en/topics/3703007)

November 29, 2022 Financial Report Review: "[B Station's Operational Turning Point is Approaching? Still Need to "Take Strong Medicine" to Break Doubts]" (https://longbridgeapp.com/en/topics/3701518) 2022 September 9th Telephone Meeting "The importance of Commercialization in line with the construction of an ecological community on Bilibili (2Q22 Telephone Meeting Summary)".

2022 September 8th Financial Report Commentary "Internal Difficulties and External Dilemmas, Bilibili is Suffering from a Hard-to-Cure "Heart Disease"".

2022 June 9th Telephone Meeting "Bilibili: Eco-friendly operation, reducing losses, the inflection point can be reflected as soon as the third quarter (Meeting summary)".

2022 June 9th Financial report commentary "Will the festive Bilibili return to its original form?".

2022 March 4th Telephone Meeting "Bilibili's 'Want, Need and Must': Want ads, generate revenue, increase users, and lower costs".

2022 March 3rd Financial Report Commentary "Answering the test papers are flat and smooth upsurge? Bilibili's faith comes from Ruidi".

Deepness

January 6th, 2023: "Pan-Entertainment 'Starting Red', Tencent and Bilibili: Whose Rebound is More Sustainable?".

June 15th, 2022: "Both are 'Blood Losses' of Giant Babies, Can Kuaishou and Bilibili Both Be Cured?".

March 22nd, 2021: "Falling in price and getting married twice, is Bilibili a trap or an opportunity?".

March 12nd, 2021: "Dolphin Research | Series Two on Bilibili: Can Bilibili really never need to post ads for a living?".

March 9th, 2021: "Dolphin Research | How far is Bilibili from Ruidi's 400 million user base?".

Hotspots

December 14th, 2021: "The carnival is over, and it turned back into a small broken station again? Bilibili needs "patch ads"!". 2021 July 27th "Shortage in Bilibili and Z age user social platform" (https://longbridgeapp.com/topics/974475?invite-code=032064)

Risk disclosure and statement of this article: Dolphin Investment Research Disclaimer and General Disclosure (https://support.longbridge.global/topics/misc/dolphin-disclaimer)