Bilibili: Confident in high advertising growth this year (1Q24 conference call minutes)

Below is the summary of Bilibili.US's Q1 2024 financial conference call. For financial report analysis, please refer to What did Bilibili do wrong again in the crazy sell-off?

I. Review of Key Financial Information

II. Detailed Content of Financial Conference Call

2.1 Key Points from Management's Statements:

(1) Financial Performance Highlights

In Q1 2024, Bilibili achieved a total revenue of 5.7 billion RMB, a 12% year-on-year growth. Advertising revenue and value-added service revenue increased by 31% and 17% respectively. The gross profit margin reached 28.3%, marking the seventh consecutive quarter of growth. Adjusted operating loss and net loss decreased by 52% and 56% respectively.

(2) User Growth and Engagement

Bilibili's daily active users (DAU) grew by 9% year-on-year to 102 million, while monthly active users (MAU) grew by 8% to 341.5 million. The average daily usage time per user reached a record 105 minutes. Total user usage time increased by 19% year-on-year.

(3) Content and Community Development

Bilibili continued to support high-quality content creation, with growth of over 20% in multiple content verticals. Daily active creators and video views of AI-related content increased by 60% and 80% respectively. Emerging content categories such as automotive, home appliances, and fashion saw over 40% growth in views.

(4) Commercialization and Revenue Sources

Advertising revenue grew by 31% in Q1, reaching 1.7 billion RMB. Bilibili enhanced the data analysis capabilities and user experience of its advertising platform, optimizing ad matching algorithms. Direct sales conversion performance of video and live e-commerce ad products improved significantly. Value-added service revenue increased by 17% year-on-year to 2.5 billion RMB, with strengthened synergy between live content and the PUGV ecosystem.

(5) Gaming Business and Upcoming Releases

Bilibili's gaming revenue in Q1 was 983 million RMB. Newly launched exclusive licensed games were well-received, and an anticipated SLG game is set to be released on June 13th. Over 2 million players have already pre-registeredPlan to launch a Japanese RPG game in the third quarter.

(6) Environmental, Social, and Governance (ESG) Initiatives and Social Responsibility

Bilibili released its 2023 ESG report, introducing its efforts in technological innovation and social welfare activities, aiming to create value for the young generation in China.

(7) Financial Details and Future Outlook

In the first quarter, Bilibili's total revenue was 5.7 billion RMB, a year-on-year increase of 12%. Value-added services, advertising, and gaming businesses accounted for 45%, 29%, and 17% of total revenue, respectively. Operating expenses decreased by 2% year-on-year, with sales and marketing expenses increasing by 5%, administrative expenses decreasing by 7%, and research and development expenses decreasing by 6%. Bilibili expects to achieve non-GAAP operating profit in the third quarter of 2024, with sufficient cash reserves to cover all convertible bonds.

II. Q&A Analyst Q&A

1. Online Advertising Business

Q: Regarding our online advertising business. Given that advertising growth exceeded expectations, could management comment on the key growth drivers? One aspect is our strengthening in advertising products and technology upgrades. On the other hand, for the second quarter, especially [indiscernible], could management comment on advertising trends and how we should view the advertising prospects for 2024?

A: Bilibili's advertising revenue reached 1.67 billion RMB in the first quarter, a year-on-year increase of 31%. Among them, performance advertising grew the fastest, achieving over 50% year-on-year growth. One of the key drivers of growth is the increase in advertising inventory while maintaining a good user experience, and further expanding advertising scenes such as dynamic and search.

More importantly, by mixing natural and commercial traffic, high-quality advertising content can obtain more natural traffic, thereby effectively increasing advertising inventory. However, there is still significant room for improvement in ad load compared to other platforms.

In addition, Bilibili integrated the Huohuo advertising system and improved the advertising delivery tools, achieving intelligent advertising delivery in different application scenarios. In the first quarter, the penetration rate of "Huohuo" among advertising clients exceeded 50%. It also launched a creative center to support batch processing of advertising materials and believes that the continuous exploration of AIGC-related functions can improve advertising efficiency.

In terms of Up main content creators, Bilibili launched the content promotion tool "Huohuo," which has now been upgraded to the new product "Bihuo" and opened to all content creators in the first quarter. This feature can help Up main creators achieve a complete path of "how to create content," "heat up and gain fans," and "achieve monetization." In the first quarter, Up main creators who purchased "Bihuo" increased by 190% year-on-year, with repeat purchases and satisfaction continuing to improve.

Bilibili also optimized its marketing data infrastructure, improved algorithm efficiency, provided more comprehensive measurement and guidance on brand promotion effects. Big data index trials have been launched in the gaming, mobile, and beauty industries, and are expected to be expanded to more industry verticals in the second and third quartersBilibili has further deepened its vertical industry solutions. In the first quarter, the top three factors driving growth were games, digital electronics, and e-commerce platforms, each achieving high double-digit year-on-year growth. In the gaming sector, Bilibili focuses on premium games covering various stages of game operations, capturing the incremental market of casual games, with daily advertising spending increasing by 50%. In the digital and electronics sector, smartphone ads already account for about 10% of total ads, and it is believed that there is still significant growth potential for other digital and electronic products in the future.

For the e-commerce platform, Bilibili diversified its customer structure this quarter, expanding partnerships beyond traditional partners such as Taobao, JD, Tmall, and Pinduoduo to include Vipshop, Dewu, Xianyu, and others. Non-e-commerce advertising ARPU has increased, and together with e-commerce platforms, actively introducing additional budgets from key active merchants, which will drive significant growth and incremental revenue in the future.

In summary, Bilibili expects to replicate and apply e-commerce solutions to more vertical fields in Q2, including automobiles, internet services, healthcare, and education industries. At the same time, it will continue to expand to more industry clients.

Regarding the June 18th shopping festival, Bilibili expects ad growth to exceed 30% this year and further increase its ad budget share in this important shopping event. This year, it will continue to implement an open environment strategy, establishing deep cooperation with Alibaba, JD, Pinduoduo, and others. Additionally, there will be two strategic upgrades:

(1) Upgrading from pure traffic cooperation to traffic plus content cooperation, with brand advertising revenue (hard ads) expected to grow by 40% year-on-year; Taobao and us have a fireworks + investment flow gameplay, JD actively participates in all our venue activities (sponsorship), focusing on content value gameplay;

(2) Shifting from platform-to-platform cooperation to platform plus merchant cooperation, with the 618 platform budget expected to grow by 30% year-on-year, while the merchant budget is expected to increase significantly by 250% year-on-year. It will strengthen cooperation with more vertical industries, encouraging consumer behavior shifts from product browsing to purchase.

Regarding expectations for 618, let's talk more about the current user transaction data, which gives us great confidence in the rapid growth of advertising this year.

a. User consumption mentality is improving rapidly, with 37.2 million users watching transaction-related content in Q1, showing a fast year-on-year increase, indicating an increasing awareness of transaction scenarios among users.

b. The number of KOLs earning income through product sales has also increased by over 100% year-on-year.

2. Outlook for the Gaming Business

Q: Regarding the gaming business. Can you update us on the overall outlook for the gaming business this year? And what are your expectations for the upcoming release of the new game "Sanmou"?

A: Bilibili's game content library has always maintained the largest and highest quality, making it the community with the highest concentration of gamers. This gives us a significant advantage in the gaming business. For this year's gaming business (agency, distribution), we summarize it with two key words: "stability" and "innovation"Regarding the "Stability" aspect, Bilibili will pay more attention to the operation of our classic old games, expecting to achieve long-term operation, maintain player stickiness, and continuously innovate content. For example, our popular game "FGO" has been launched for 8 years and returned to the top of the iOS bestseller list during the content upgrade in April this year. Another game with a 7-year history, "Azur Lane," also re-entered the top ten of the iOS bestseller list during its 7th-anniversary event.

In fact, operating classic old games is more efficient than directly creating a new game. Bilibili plans to continue refined operation to extend the game's lifecycle. For example, "FGO," which has been released for 8 years, has already become a part of players' lives, and we hope to operate it for over 10 years.

Regarding the "Innovation" aspect, we launched a traditional Chinese style game called "Wu Hua Mi Xin" in April, attracting a new user group interested in traditional Chinese culture, which is an increment. It is expected that this game will contribute to our game revenue in the second quarter. We will continue to develop a new game combining the second dimension with a certain vertical category in the future.

As for the upcoming SLG game "Three Kingdoms: The World is Determined," we have scheduled its release for June 13th, with over 2 million users already pre-registered. We have conducted multiple rounds of paid and unpaid tests based on user feedback, and the results have been very positive. We signed a cooperation agreement with the development team for this game two years ago and found that a large portion of Bilibili users who prefer grand narratives resonate with this product.

Through these two examples, Bilibili demonstrates its thoughts and strategies in game business innovation and long-term strategy. As the largest game content community, Bilibili will continue to focus on providing high-quality games to our users.

User Engagement and Content Strategy

Q: Regarding user engagement. (1) The company achieved record-high levels of engagement and daily user time in the first quarter. What are the main driving factors behind this? (2) Which content categories have huge potential in the future?

A: Bilibili has unique advantages in content categories, and users have a strong demand for finding such content, including knowledge in the second dimension, technology, and digital products. The demand for these categories is very strong, and by maintaining competitiveness and strengthening leadership, Bilibili will naturally bring about traffic growth. For example, this year, content viewing growth in the technology, knowledge, and gaming categories was 37%, 28%, and 24%, respectively.

At the same time, Bilibili is actively expanding into new content categories. The average age of Bilibili users has reached 24 years old, and some users' children may be around one year old, bringing about consumption demands for baby, automotive, and home appliance content. For example, in the first quarter, video views in the baby category grew by over 100%, and automotive and home appliance content also showed strong growthThese emerging content categories have attracted more content creators to join the platform, forming a virtuous cycle. In the first quarter, Bilibili's overall community performance was strong, with a 9% increase in daily active users, a 22% increase in video views, and an average daily user duration reaching a historical high of 105 minutes. All of these indicate that our content development and community operation strategies are very effective, and we will continue to execute this strategy to achieve sustainable growth.

Cost Control and Profit Margin Outlook

Q: (1) In which specific areas have we done well in controlling costs? (2) What are your views on medium to long-term gross profit margins and third-quarter profit targets? (3) Any updates?

A: In the first quarter, total revenue increased by 12% year-on-year, while revenue costs only increased by 2%, resulting in a 45% increase in gross profit. Non-GAAP operating expenses decreased by 2% year-on-year and 8% quarter-on-quarter, further reducing losses.

Bilibili's path to profitability is mainly driven by revenue growth and gross margin improvement. It is expected that in the second and third quarters, with the continued rapid growth of advertising business and the recovery of the gaming business, the gross margin will further increase. The gross margin is expected to reach 30% in the third quarter, achieving non-GAAP operating breakeven. In the long term, the gross margin will depend on the scale of revenue and the combination of various business lines, with still great potential. Bilibili will continue to improve commercial efficiency, refine operational strategies, and achieve continuous improvement in gross margin and net margin.

Community-based Content Subscription Business

Q: Regarding the paid user business. We see that the company is now close to 30 million paid users. In addition to traditional subscription members, we have successfully launched value-added services such as Up main charging, paid courses, or community decorations. How does the company view the prospects of community-based content subscription business?

A: Bilibili has always been an interest-based video community, with users having high retention rates, high engagement, and high ARPU (average revenue per user). Because users have a strong sense of belonging to the community, content subscription is a natural way of monetization. In the first quarter, Bilibili had nearly 22 million premium paid members, with 80% choosing the annual membership, which is a long-term payment method that sets it apart from other long video platforms.

In addition to traditional live streaming and premium membership, Bilibili continues to explore more business models to better integrate community and content, including paid courses, Up main charging, and community decoration services. After users pay for these services, they will have a better experience and also express their love and appreciation for their favorite Up main or IP, which is also a new revenue channel for Up mains, creating a virtuous growth cycle in the community.

In the first quarter, the total revenue from memberships, paid courses, charging, and community decorations has reached nearly 1 billion RMB. Paid courses not only include traditional professional courses but also cover a wider range of categories such as life skills, interest knowledge, and even interpersonal relationships. Paid courses have become an important way for content creators and knowledge fields to monetize. In the first quarter, the number of Up mains earning income through paid courses increased by 450% year-on-year, with overall revenue increasing by 45%In addition, Bilibili has upgraded its charging mode. The number of Up main creators who received charging income in the first quarter increased by 47% year-on-year, and the total GMV increased by 125% year-on-year. For example, there is a case where an Up main creator has only released 4 high-quality documentaries in the past 6 months. As of early May, their GMV has exceeded 10 million RMB. This indicates that new areas such as short dramas, short documentaries, and short animations have great potential on Bilibili.

In the second half of this year, Bilibili plans to systematically review and upgrade value-added services, including these content services. They are confident in their business prospects and believe this will continue to bring additional revenue and help content creators earn more income.

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