Bilibili: The plan for "Three Strategies" is a five to ten year operating cycle (3Q24 conference call summary)

The following is the summary of Bilibili's 3Q24 conference call. For the financial report interpretation, please refer to “Bilibili: It's all the high expectations' fault, the small station is not that bad”

1. Overview of Financial Indicators

2. Management Report

1. Current Operational Achievements and Future Business Strategy

We achieved adjusted net profit in the first quarter while setting new records in community metrics. These milestones strongly demonstrate our ability to achieve profit growth and the unique community value we will continue to unleash. Looking in detail at our financial situation, total revenue in the third quarter accelerated growth, increasing by 26% year-on-year to reach 7.3 billion yuan.

The revenue contribution from our high-margin gaming and advertising businesses continues to increase, driving gross profit growth of 76% year-on-year and pushing the gross margin from 25.0% in the same period last year to 34.9%. As a result, we successfully exceeded our commitment to break even in the third quarter, achieving an adjusted operating profit of 272 million yuan and an adjusted net profit of 236 million yuan. While making significant financial progress, we continue to grow and nurture our community.

In the third quarter, both DAU and MAU reached historical highs of 107 million and 348 million, respectively. Meanwhile, the average time spent per user per day rose to a new high of 106 minutes. With strong user retention and engagement, our users have remained with us and grown alongside the platform.

Currently, the average age of Bilibili users is 25 years. As these users' purchasing power continues to increase and they enter new life stages, we will continue to curate more diverse content and services to meet their evolving needs.

Looking ahead, we remain committed to building an enthusiastic and inspiring video community that includes all the videos you love. Our return to profitability marks a new starting point in our journey. We will continue to invest in key infrastructure to support content creation and distribution, consolidate our leading position in high-quality video content, and create value for all stakeholders. Through this overview, let’s start with content and community to gain a more detailed understanding of our core content, community, and commercialization pillars.

In the third quarter, our daily average video views exceeded 5.7 billion, a year-on-year increase of 23%. This growth reflects the effectiveness of our strategy to expand content categories and encourage high-quality content creation. While our main categories remain popular, consumption-related categories continue to rise.

As the younger generation becomes the mainstream of consumer society, user demand is increasing, driving this trend. Video views in the fashion, home appliances, and decoration sectors increased by over 25% year-on-year. Meanwhile, viewership in the automotive, baby and maternity, sports, and fitness categories surged by over 40% compared to the same period last year The diversified commercialization channels we provide continue to enable our content creators to realize their commercial value while pursuing their favorite content. In the first nine months of 2024, nearly 2.7 million content creators earned income through various channels on our platform.

During this period, the total revenue generated by content creators through our various advertising and VAS products grew by 24%. Notably, the total revenue generated by content creators through fan-paid products increased by over 400% year-on-year during the same period. Speaking of our community metrics, in the third quarter, our daily active users spent nearly 106 minutes on our platform each day, compared to 100 minutes in the same period last year. Our monthly interactions exceeded 19.3 billion, a year-on-year increase of 14%. As of the end of the third quarter, our premium members increased to 251 million, with a 12-month retention rate of around 80%.

In addition, our sponsored esports team Bilibili Games, BLG, achieved second place in the League of Legends S14 World Championship, setting a new record in the team's history. We are proud of their achievements and look forward to their continued success in the coming year. Such events continue to support our leadership position in the gaming community and make Bilibili the preferred choice for the younger generation. Last but not least, we are pleased to share that our MSCI ESG rating has been upgraded to A this year.

This reflects our steady improvement in ESG over the past few years. This achievement highlights our commitment to advancing ESG practices, as we leverage our influence to create a positive impact on the community and society.

2. Performance of Various Business Segments

Now, I would like to discuss the commercialization progress of our various business lines.

(1) First, regarding our gaming business. In the third quarter, driven by the outstanding performance of the strategy game "Sanmou," our gaming revenue grew by 84% year-on-year, reaching 1.8 billion yuan. The initial performance of the game has strengthened our confidence in the long product cycle of Sanmou. We will continue to launch new content updates and gameplay to provide users with a better gaming experience.

The success of Sanmou demonstrates the immense potential of our gaming community. We plan to leverage our unique advantages in the gaming industry to further explore opportunities in different types of games. Meanwhile, we remain committed to bringing the best ACG games to our users. Our older games "FGO" and "Azur Lane" have maintained their popularity as they celebrate their eighth and seventh anniversaries, respectively.

Additionally, we launched the Japanese RPG game "Jujutsu Kaisen Phantom Parade" in overseas markets in November, which received positive reviews.

(2) Turning to our advertising business. Our advertising business continued to outperform the industry in the third quarter. Advertising revenue grew by 28% year-on-year, reaching 2.1 billion yuan.

The strong revenue growth from performance advertising was the largest contributor, with a nearly 50% year-on-year increase in the third quarter. Brand and native advertising revenue also achieved substantial year-on-year growth, enhancing our comprehensive marketing capabilities In the third quarter, our top five vertical advertising industries were gaming, e-commerce, digital products, home appliances, internet services, and automotive. As e-commerce platforms increasingly recognize the commercial value of our unique young user base, they have allocated larger advertising budgets to our platform.

We saw significant growth during the summer vacation and back-to-school season, leading to an 80% year-on-year surge in e-commerce advertising revenue. Meanwhile, we also attracted more advertisers from emerging vertical industries, particularly in education, during the third quarter.

The baby and maternity, travel, and accommodation sectors all experienced over 100% year-on-year growth. Additionally, we continue to enhance our advertising infrastructure to improve efficiency, and we have already seen early benefits from these efforts. For example, with the launch of a more user-friendly and effective advertising delivery system, the number of performance advertisers in the third quarter increased by over 40% year-on-year.

We plan to further integrate artificial intelligence technology into our smart advertising delivery system and launch a series of tools to create advertising materials with greater efficiency and lower costs. These initiatives are expected to attract and retain more advertisers on our platform.

(3) Speaking of our Value-Added Services (VAS) business, in the third quarter, our VAS revenue grew by 9% year-on-year, reaching 2.8 billion yuan. This quarter, we welcomed more users to join and enjoy our live streaming universe. We continue to expand our content offerings to meet their diverse interests. At the same time, we remain focused on refining our business to ensure sustainable growth while improving profit margins.

Our premium membership program has seen steady year-on-year growth, with membership numbers approaching 22 million in the third quarter. Over 80% of members have opted for annual subscriptions or auto-renewal packages. Additionally, other VAS products experienced rapid growth, with charging revenue surging over 500% year-on-year, indicating a strong willingness among our users to pay for quality content. As we celebrate our profitability in the first quarter, I want to thank our dedicated team, loyal user community, and supportive partners and shareholders.

Looking back over the past 15 years, we have made significant breakthroughs in content provision. We have expanded our user base and developed a diverse range of monetization products. These efforts have helped us establish a unique video community with a distinctive user experience in a highly competitive industry environment.

Turning losses into profits is just a new beginning. Building on this milestone, we will continue to strengthen the positive growth cycle of our business to drive sustainable profits in the future. At this point, I will hand the call over to Sam to share more financial details.

III. Analyst Q&A

Q1: After achieving breakeven this quarter, what is management's strategic view of Bilibili's future focus on users and commercialization, and how will it strengthen its positioning in the retail industry?

A: We truly believe this is a natural result of our business model engagement and industry expansion. We are simply making it happen faster. Before discussing our future development strategy, I would like to briefly summarize the logic behind Bilibili's profitability First of all, the industry we are in, the video industry, is a very large market. And China itself is the largest and lowest market. Video is a big business. In this industry, Bilibili has seen a very unique PUGB community, known for its high-quality video content, and we have cultivated a user mindset.

Whenever mid-to-long videos are mentioned, the brand that users first think of is definitely Bilibili, with no one else. They can't even think of a second brand. Because video is a super large market and is the mainstream of future internet media. So I think this high quality and this mindset are like gold.

Because video is so vast, from an extremely insufficient content supply to now, I believe the supply of video has become increasingly abundant. Users now want to see upgraded high-quality and unique video content. Therefore, I think there is a very obvious trend in the video industry now, called content consumption upgrade.

Moreover, we are the so-called Z generation video platform with the highest density of post-90s and post-00s in China. And over the past 15 years, our users have been very good. They have grown up step by step with Bilibili. Currently, the average age of users on our platform has reached 25 years. This age also allows the business value of users to continuously increase. So we can see that, due to the series of reasons I just mentioned, the development of our business must accelerate. Profit is a natural result. Looking to the future, the business potential will be further released.

We have stated that our focus will be on community growth and business growth. After achieving profitability, our focus will still be on transformation. In terms of business, I want to say two things.

1) First, we will focus more on core businesses, such as advertising and gaming. Because the revenue ceiling of these core businesses is higher, and the profit margins are also higher. Therefore, we focus on these areas to make our business growth more effective.

2) The second point is that we will always focus on leveraging business to complement our content ecosystem, and then form our content, which is equivalent to better content growth and return on investment. In the past, we have been continuously guiding the business to help the application increase revenue.

In fact, in the first nine months of this year, through our various business channels, 2.7 million content creators have earned income on the Bilibili platform. This commercialization has helped our content creators realize their commercial value to some extent, thus incentivizing them to create further and more content. I want to point out that on the Bilibili platform, business is not just advertising. Bilibili is a comprehensive business model platform.

In addition to the revenue generated from advertising sales, we also provide more tools to help them realize their commercial value and build connections among fans. For example, on top of the native advertising Sparkle platform, we also have a fan charging plan. We also have a craft studio that encourages content creators to monetize their skills (such as crafts and painting).

There are also advanced courses to help them earn money in various ways. Finally, I want to say that I believe the profits in the third quarter are just the beginning. Next, I believe business growth can better promote the prosperity of our content ecosystem, forming a positive feedback loop I believe that business growth can make Bilibili healthier and more sustainable.

Q2: What are the driving forces behind advertising growth in the third quarter? Have you seen any changes in demand from advertisers due to changes in the macro environment as we enter the fourth quarter? How did the e-commerce advertising perform during Double 11?

A: The growth of performance advertising in the third quarter was 50%, which is the main driver. Our efforts include:

1) Optimizing the delivery chain. Through intelligent delivery settings on mobile, the number of clients has increased sevenfold. In the future, we will continue to help overall advertisers lower the barriers to entry. We can also see another set of data. After integrating Huohuo into the advertising system, the proportion of investment in Huohuo merchant orders has been continuously increasing.

2) Optimization of the advertising delivery system. In the third quarter, the number of clients and the volume of mobile intelligent application delivery increased by 700% year-on-year. We will continue to improve our products and tools, such as the combination of the "Huohuo + Qifei" tool.

3) On the other hand, we are improving the ad loading rate across multiple screens and scenarios. In addition to the rapid growth of StoryMode, we can see that in the recent Q&A sessions, we contributed more advertising revenue than ever in related recommendations, searches, and even on PC and Pad ports. In fact, it is worth looking forward to that perhaps in the future we will gain more advertising revenue through live streaming, in-game live streaming, trending searches, and other methods.

Additionally, we will mix commercial traffic with organic traffic, giving more organic traffic to native ads, creating an effect where ads are content and content is ads, thereby increasing the overall advertising inventory.

4) Increasing more AIGC tools. I will further promote more AIGC tools to help advertisers automatically generate or modify a large number of content advertising materials, further lowering the barriers and costs.

In addition to maintaining a large budget in these advantageous industries, we can also see that in the gaming industry, apart from the games we are better at, Q3, and mini-games, the daily delivery has increased by 200% month-on-month. Furthermore, in the digital home electronics industry, during product launch scenarios, tech brands like Apple, Huawei, and Vivo will be the first to launch on Bilibili.

In the third quarter, the top five vertical industries came from the first-ranked gaming, second-ranked e-commerce, digital products, and online services, with the fifth being automotive. In the leading or advanced vertical fields where we have a clear advantage, we continue to expand our market share.

In the third quarter, we gained a lot of advertising budgets during non-shopping festival periods, with e-commerce advertising revenue increasing nearly 80% year-on-year. Traditionally, we see e-commerce platforms spending more on advertising during major shopping festival seasons, but in the third quarter, we actually attracted more advertising budgets during the summer vacation and back-to-school seasons.

During Double 11, we maintained an open-loop strategy and became a deeply trusted partner of e-commerce platforms such as Alibaba, JD.com, Pinduoduo, and Vipshop. The GMV of video and live-streaming e-commerce increased by over 150% year-on-year, and the number of participating content creators grew by 80%. Among the customers we brought to these stores, the new customer rate across all industries averaged over 50%, including 3C and digital products, home decoration, beauty, and maternity and baby products We have become a major source of new customers for all e-commerce platforms, which has also helped us achieve nearly 50% year-on-year growth in advertising revenue during the Double 11 period.

Our observation of the macroeconomic environment is that there is still uncertainty in customer budget investments, but in the long run, we are optimistic about the domestic economy. Different industries may experience different situations.

For example, we see changes in national subsidy policies, which will lead to a stronger recovery in the budgets for 3C digital products and home appliances. Additionally, we can also see that food and beverage, healthcare, and education sectors will gradually restore market confidence. Meanwhile, the marketing budgets for automobiles, cosmetics, shoes, and real estate remain very tight. We judge that in the short term, there will still be differences and fluctuations among different industries.

We expect Bilibili's advertising growth in the fourth quarter to outpace the industry.

Q3: What actions will be taken for the future growth performance of the game "Three Strategies"? How to acquire users and grasp the rhythm? Is there any update on the pipeline?

A: "Three Strategies" has performed among the top in the industry this year, frequently entering the App Store's top 3 bestsellers. "Three Strategies" is currently in its third season and will soon enter the fourth season (11.16). The most important goal for "Three Strategies" is to achieve long-term operation, which I mean over five or even ten years.

We mentioned the long-term operation goal to the team during the game development phase, so we have made ample planning and preparation for long-term operation in both game design and operational methodology. Therefore, starting from the first three quarters, I believe user activity and retention rates should be among the best in the industry. Because this user activity and retention are prerequisites for our long-term operation.

In the new season, we will launch new maps, characters, and new storylines. We are very confident that with the updates of new version content, we will provide users with a more engaging and interesting gaming experience. As you can see, we are doing a lot simultaneously in League of Heroes. We will also frequently seek user feedback and listen carefully to their opinions. In any case, players should consider our team as the most attentive to player feedback in the industry.

One of the most important tasks for our gaming business next year is to operate "Three Strategies" well. In terms of strategy games, we will only produce this game in the long term. Then we will ensure that this game is truly in place. Because I believe the ceiling for this game is high enough. Our entire operations team is also very elite. In the second half of this year, we will begin preparations for the overseas launch of "Three Strategies," starting with the traditional Chinese version. We also look forward to bringing this high-quality strategy game to global users.

We have achieved success in this strategy genre. In addition to strategy and ACG genres, next year we will also explore a new genre as a way to advance the youthfulness of our categories and gain additional market share.

Regarding ACG games, on November 7th, we released the new game "Jujutsu Kaisen" for the first time in overseas regions outside of Japan. From the current situation, user feedback is good, ranking first in download charts in over 70 countries and regions, meeting our expectations, and marking an important step towards global expansion. "Jujutsu Kaisen" is a very important game for us next year

Q4: What is the company's long-term outlook on gross margin and net margin? I noticed you announced a new buyback plan, what will future shareholder returns be?

A: In the third quarter, we not only achieved the previously promised breakeven target but also exceeded the adjusted profit by RMB 270 million. These results demonstrate the potential of our business model. Revenue grew by 26% in the third quarter, and gross profit increased significantly by 76% year-on-year, with gross margin rising from 25% to 35%. This improvement is attributed to the increased revenue share from advertising and gaming, as well as effective control of fixed costs.

We believe there is still long-term room for improvement in our gross margin as advertising and gaming revenues continue to grow. It is worth mentioning that our operating cash flow reached RMB 2.2 billion in the third quarter, and RMB 4.6 billion in the first three quarters. This indicates that our business is moving towards a healthy positive cycle, which is also the basis for our $200 million buyback plan to be executed over the next 24 months.

Looking ahead to the fourth quarter, if you look at our deferred revenue balance, the balance at the end of the third quarter increased by RMB 380 million quarter-on-quarter, laying a solid foundation for the fourth quarter. Therefore, we expect the revenue from gaming and advertising businesses to maintain strong growth momentum, and gross margin to improve further quarter by quarter.

Q5: Since the end of September, we have seen some changes in macroeconomic and policy implementation. From Bilibili's business perspective, have we seen any improvement or acceleration in the economy? Whether in advertising, gaming, live streaming, or users' willingness to pay.

A: From a business perspective, we are very pleased to see these aggressive economic policies. I believe these policies themselves are very good signals, representing the government's recognition of the importance of the economy. Recently, we have also felt the government's attention to private enterprises and its determination to optimize the business environment.

Of course, we should also be aware that the proposal and implementation of policies take time. But I believe that if the direction is set to truly get the economy running, then the timing is right.

Although some of these policies are still in the works and their effects may take time to materialize, we believe it is just a matter of time, as the overall direction has been determined and is clear. Bilibili is part of the platform economy, which is a key component of China's broader economy. Therefore, when the overall economy improves, Bilibili will undoubtedly benefit from this improvement.

Of course, as a business, all we can do is to do our best. I think the macro economy is definitely an additional bonus. If we do our best, it would be even better if the macro economy is favorable. However, all the planning we are doing, including our expectations for the future, does not take the macro economy into account.

The company believes that this quarter's profitability is a natural result of the business model and industry expansion, and will continue to focus on community growth and business growth, with a focus on core businesses such as advertising and gaming, leveraging business to complement the content ecosystem and form a positive cycle.

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