BILI: the Youngest Platform Hard to Grow
After the Hong Kong stock market closed on June 1st Beijing time, Bilibili ($Barnes.USilibili.US / $Barnes.USILIBILI-W.HK) released its Q1 2023 performance report. The announcement of the results on Children's Day seems to be in line with B station's "Z generation" label.
Although B station's differentiated positioning is widely recognized by the market, it is always difficult to implement how to operate and make money. After reading the Q1 report, there were no surprises, but it brought more concerns - the Q1 peak season for customer acquisition saw a loss in user base again. In a market where expectations were not high, revenue did not beat expectations, and although the loss reduction exceeded expectations, it was achieved through cost-cutting. Combined with the market reaction after the financial reports of other internet peers, this cost-cutting story has not caused much of a stir.
Although profitability is B station's top priority, this cost-cutting strategy that has led to stagnant traffic growth is not what the market wants. The company claims that agent games and self-developed games will be launched one after another in Q2. In the short term, B station may be able to rely on the game pipeline cycle and last year's low base to accelerate the recovery of game revenue and advertising revenue. However, the problem of content supply due to Up main's discontinuation, user loss, and internal management chaos will cause greater harm to the company's long-term operation and needs to be taken seriously and resolved.
Key points:
1. Difficult to acquire customers during peak season? B station's monthly active users declined for the first time last quarter, which has already alerted the Dolphin Analyst. Although it can be attributed to the off-season, in Q1, which is the peak season for customer acquisition, B station's user base continued to decline, which is difficult to explain.
For B station, which has only 300 million+ users, offline recovery cannot be used as an excuse for user loss. For Little Red Book, which also has a concentration of young users, user growth has not been greatly affected.
Therefore, the Dolphin Analyst believes that more factors should be attributed to content, especially the supply of high-quality content, which is the key factor leading to user loss.
2. Mediocre revenue: Overall, Q1 revenue met expectations, but compared with peers, it was mediocre. Game revenue still declined by 16.7% YoY due to the lack of new games launched, advertising revenue recovered to a YoY growth of 22% due to the low base last year (StoryMode was not officially commercialized until the second half of 2022), live broadcasting and premium membership only grew by 5% YoY, and e-commerce revenue continued to decline, which is related to the company's active contraction. In the second quarter, several proxy games ("Honkai: Star Rail", "Uma Musume") and self-developed games "Illusion Connect: Starfall" and "Sinoalice" were launched. Therefore, compared with the dullness of last year, game revenue in the next quarter will provide significant support to overall performance.
In addition, there is advertising revenue, which is also due to the low base last year. In the second quarter of last year, not only was there an impact from the epidemic, but StoryMode had not yet been commercialized, so there will also be a trend of expanding growth.
3. Profit exceeds expectations, cutting 1/3 of expenses in two ways: In the first quarter, compared with the same period last year, revenue remained stable, but operating losses of 1.3 billion were one-third less than last year. The reduction of 600 million in losses mainly came from the contraction of two aspects of expenditure. One cut of 300 million was made in costs (revenue sharing, bandwidth), and another cut of 300 million was made in marketing expenses. The Q1 gross profit margin increased by 6 percentage points to 21.8% year-on-year, and the marketing expense ratio decreased to 17.4%, returning to the level of 2019.
4. Cash flow is stable: As of the end of the first quarter, Bilibili had a total of 19.4 billion yuan in cash, deposits, and investments, which was basically the same as the end of last year. Short-term interest-bearing debt due within one year was 6.9 billion yuan, and long-term debt was 6 billion yuan.
Compared with the convertible bond issue of Bilibili discussed by Dolphin Analyst in the previous quarter, although Q1 still faces the situation of high convertible bond requirements for early redemption, the cash pressure has been somewhat relieved due to the reduction of operating losses.
However, as the saying goes, whether financing risks can be completely eliminated still needs to be seen step by step. In the current situation of sustained macroeconomic downturn, whether the commercialization process can grow as Bilibili indicated, especially the growth rate after the base effect in the second half of the year, and the development progress of self-developed games, and the sustainability of operation revenue after launch, are all fluctuating factors that may put pressure on cash flow.
Dolphin Analyst's Viewpoint
The losses have been reduced, and the turning point for profitability is approaching, but Bilibili hasn't changed, and at least on the first quarterly report, the core issues have not improved, but there are more hidden dangers.
The increase in StoryMode's penetration rate has brought limited commercialization increments for the time being.
Is it an operational capability issue? Or is it a user preference issue? For investors outside the company, it is a black box. There may be influences from various factors, but from the results, the execution effect is too poor. Either the people are not good enough, or it is a naturally difficult problem to solve.
In order to reduce losses faster, the company is also sharpening its knives outward, even at the cost of reducing the creation incentives for Up owners and professional content costs, which in turn affects the supply of high-quality content and causes user loss.
However, Dolphin Analyst pointed out in "All are "Blood Loss" Giant Baby Diseases, Who Can Cure Them, Kuaishou or Bilibili?" that Bilibili's problem is not in costs. The average customer acquisition and maintenance cost per user is less than half of Kuaishou's. But if we only look at the direct monetization of individual users and the "acquisition + maintenance" cost model, Kuaishou has actually been successful in the past two years, but Bilibili's traffic monetization revenue has always been lower than its cost.
Although both are video content, unlike Kuaishou's direct payment for customer acquisition, and then the traffic is naturally retained on the platform by the power of short video black holes, Bilibili's actual customer acquisition expenses are actually divided into content costs (including creative incentives), cutting this expense can certainly optimize profits in the short term, but in the medium and long term, it has a greater impact on the platform's operations.
Combined with the recent internal management issues of the e-commerce business line, as mentioned last quarter, the root of the above problems comes from the team's poor strategic and execution capabilities in commercialization. Perhaps the second quarter and the second half of the year will bring some relief to the pressure, and give Bilibili another opportunity for internal adjustment in the short term, but it depends on whether the team can seize it.
Detailed analysis of this quarter's financial report:
1. Beware of stagnant user growth
In the last quarter, Dolphin Analyst had already expressed some concerns about the platform's traffic, but the company repeatedly emphasized in the conference call that it would achieve quality and quantity growth, and focusing on user quality did not mean giving up on user growth.
However, in Q1, which is the period of customer acquisition, the number of users lost again by 10.8 million, which is unacceptable. If it is said that there is offline diversion, but compared horizontally with peers, it has not been affected.
In the first quarter, Bilibili's overall monthly active users (App, PC, TV, etc.) reached 315 million, a year-on-year increase of only 7%.
1）User interaction: Focus on user quality and increase stickiness
The indicator that reflects user stickiness, DAU/MAU, has increased to 29.7%, and the average daily user time is 96 minutes. The increase in the activity of existing users should be related to the penetration rate of Story Mode.
2）User payment: No content, no willingness to spend money
Bilibili did not disclose the number of paying users in the first quarter, but judging from the decrease in the number of big members and the sluggish game business, the MPU in Q1 should be very poor.
In the first quarter, the number of big members was 20.2 million, and with the decline in popularity of works such as "The Three-Body Problem" and the lack of follow-up hit content, it decreased by 1.2 million compared to the previous quarter.
3）Ecological balance: After incentive adjustments, long-tail Up owners are losing.
At the beginning of the year, the adjustment of incentive rules has put a lot of pressure on Up hosts' growth since this year. After the number of Up hosts did not increase by 3.8 million in the last quarter, B station did not report this number in the first quarter. At the same time, B station disclosed that the number of daily active Up hosts increased by 40% year-on-year. Only semi-professional/professional Up hosts above the waist have higher activity, so the growth of Up host DAU indicates that more small and medium-sized Up hosts have left the platform.
The underlying business strategy may be to focus on head quality Up hosts, actively abandon long-tail Up hosts by reducing creative incentives, and then achieve optimization of a profitable model. Because the income source of head quality Up hosts does not rely on the platform's creative incentives, but on advertising, live broadcast rewards, and live e-commerce commission sharing.
However, this will also bring problems - long-tail Up hosts continue to accelerate their departure, user loss, and the platform's dependence on head quality Up hosts becomes heavier, and even exclusive agreements are needed.
On the other hand, user participation is still high in the off-season, with an average of 44 videos watched per day per user. The increase in quantity mainly depends on the penetration rate of Story Mode short videos.
2. the income meets expectations, but compared with peers, it is mediocre.
In the first quarter, B station achieved a net revenue of RMB 5.1 billion, which was flat year-on-year. Although it basically met market expectations, compared with other Internet peers, its scale and growth rate were too mediocre.
The guidance for the full year of 2023 has not changed, still between RMB 24-26 billion. Dolphin Analyst said in the last quarter that he was not satisfied with this guidance.
For the second quarter, the company's guidance and market expectations are relatively positive. Especially for the game that continued to decline in this quarter, the second quarter will usher in a product launch cycle. In addition to the blessing of the joint operation of "Collapse Iron" and the exclusive agent of "Horse Girl", B station also expects to launch 1-2 self-developed games in June, and the market is expected to achieve growth of more than 20%.
The market has such expectations, not only considering the macroeconomic environment's recovery but also hoping that B station's content such as "The Three-Body Problem" and "Chinese Tales" will bring higher traffic growth and advertising sponsorship. And the repair brought by the joint operation of the popular mobile game "Honkai Impact 3rd".
In addition to games, it is also hoped that advertising will be repaired. In addition to higher expectations for the commercialization of StoryMode, it also expects that after the normalization of game supervision, the industry's game promotion will quickly recover and promote B station's commercial performance.
3. Business Segmentation: Short-term Recovery Expected in Q2
1）Advertising: Significant Improvement
Bilibili's advertising revenue in Q1 was RMB 1.27 billion, a year-on-year increase of 22%, and a significant improvement from the previous quarter. However, due to the fact that Bilibili has more game and entertainment-related advertisements, and the first quarter of last year was just when the game promotion industry began to shrink, the base is not high. Therefore, this degree of improvement is also within market expectations.
2.）Gaming: Expected to "Take Off" Next Quarter
Bilibili's gaming revenue in Q1 was RMB 1.132 billion, a year-on-year decrease of 16.7%, due to insufficient supply of "high-quality" new games.
Compared with the previous quarter's expectations, Dolphin Analyst is more optimistic about Bilibili's gaming revenue. On the one hand, miHoYo's "Honkai Impact 3rd: Star Rail" has received good feedback since its launch, and Bilibili, as the co-operator, will also benefit from it. On the other hand, the industry's game licenses continue to be issued normally, and Bilibili's two self-developed games have obtained licenses in the past two months. One of them, "Illusion Connect," has been launched overseas in April and has received positive feedback.
3）Live Broadcasting and Premium Membership: User Loss and Epidemic Impact, Slow Growth in Payment
Bilibili's value-added revenue from live broadcasting in Q1 was RMB 2.16 billion, a year-on-year increase of only 5%. The number of premium members has not increased significantly, so the only 5% growth is still driven by live broadcasting revenue. However, due to the overall user loss of the platform and the possible peak of the epidemic in the first quarter, it has affected the activity of the anchors. But this declining growth rate still inevitably reminds people of the fate of Douyu and Huya.
As for premium membership, it mainly depends on the content schedule for the current period. Compared with other long videos, Bilibili has advantages in second-dimensional content. The performance in the first quarter was not good, with 20.2 million paid users, a decrease of 1.2 million from the previous quarter, and there was no popular content to follow after the decline in popularity of "The Three-Body Problem."
4）E-commerce and Others: Expected to Continue to Shrink
Bilibili's self-operated e-commerce mainly relies on loyal fans and core users of the second dimension. The single product price is high, so it is difficult to expand the scale before expanding the category. Moreover, under the influence of the economic downturn and the impact on user purchasing power, there is also pressure on growth.
Q1 e-commerce revenue was only 500 million, a year-on-year decrease of 15.5%. In addition to the decline in demand itself, it is also related to the company's active reduction of low-margin product sales.
This kind of niche user demand is difficult to penetrate outward, so under the company's strategy of actively selecting and optimizing products, the subsequent scale will continue to shrink.
4. Loss reduction exceeded expectations
Among the total expenditure items of B station's cost + expenses, revenue sharing costs are the highest, accounting for one-third. Followed by content procurement costs, server bandwidth costs, and R&D personnel salaries, the decrease in the proportion of revenue requires the expansion of the realization end to achieve.
In the first quarter, the operating loss rate decreased by 12pct year-on-year in the case of flat revenue, mainly cutting costs and marketing expenses.
(1) In the first quarter, the operating cost decreased by 6.6% year-on-year, mainly reducing server bandwidth costs, revenue sharing costs, and personnel expenses, and the overall gross profit margin increased by 1.5pct on a month-on-month basis and nearly 6pct year-on-year, which is slightly higher than the market expectation.
(2) The cost side mainly reduced marketing expenses by 300 million, which continued to decline by 30% year-on-year, the same as last quarter. After the one-time expenses such as compensation for layoffs in the previous quarter and the restructuring costs of merging studios were completed, the growth rate of R&D expenses also quickly slowed to 2%.
Under GAAP, the operating loss was 1.38 billion, with a loss rate of 27%, and under non-GAAP, the operating loss was 1.1 billion, with a loss rate of 22%. In the short term, there was a significant improvement in the month-on-month comparison, but if the reduction in losses is still achieved through contraction, the sustainability is limited. For B station, the release of profits does not depend on "saving money", but on effectively "making money".
Dolphin "B Station" historical articles:
Financial report season (showing the past year)
March 3, 2023, financial report review "B Station Needs a "iQiyi-style" Blood Transfusion invite-code=)》
Telephone meeting on March 3, 2023: "The absolute value of this year's expenses has decreased, and new games will be launched intensively in the second quarter (B station telephone meeting summary)"
Telephone meeting on November 29, 2022: "B station: We will not easily do patch placement and will firmly focus on gaming as the company's main business (3Q22 telephone meeting summary)"
Financial report review on November 29, 2022: "Is B station approaching a turning point in its operations? It still needs to take drastic measures to dispel doubts"
Telephone meeting on September 9, 2022: "B station: The importance of commercialization is on par with the construction of an ecological community (2Q22 telephone meeting summary)"
Financial report review on September 8, 2022: "B station is plagued by internal and external problems, and its "heart disease" is difficult to cure"
Telephone meeting on June 9, 2022: "B station: The ecological system is operating benignly, and the turning point of reducing losses will be reflected in the third quarter at the earliest (telephone meeting summary)"
Financial report review on June 9, 2022: "Is B station going back to its original form after the carnival?"
Telephone meeting on March 4, 2022: "B station's "want, need, and have to": advertising, revenue, user growth, and cost reduction"
Financial report review on March 3, 2022: "Can B station's faith in Rui Di overcome its mediocre performance and boost its stock price?"
Depth:
January 6, 2023: "In the general entertainment industry's "good start," whose rebound will be more sustainable, Tencent or B station?"
June 15, 2022: "Both are "blood loss" giant babies, can Kuaishou or B station recover?" 2021 March 22nd "Is Bilibili a Trap or an Opportunity as It Depreciates and Remarries?"
2021 March 12th "Dolphin Research: Bilibili Series 2 - Can Bilibili Really Support Your Family?"
2021 March 9th "Dolphin Research: How Far Is Bilibili from the Four Hundred Million User Market?"
Hot Topics
2021 December 14th "The Carnival Is Over, Is Bilibili Back to Being a Small Station? Bilibili Needs 'Patches'!"
2021 July 27th "Bilibili, a Social Platform for Z Generation Users, Still Has Scarcity"
