Good day, and welcome to the Bilibili First Quarter 2023 Financial Results and Business Update Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Juliet Yang, Executive Director of Investor Relations. Please go ahead..

Thank you, operator. During this call, we'll discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today.

Actual events or results could differ materially from those mentioned in today's news release and in this discussion due to a number of risks and uncertainties, including those mentioned in our most recent filing with the SEC and Hong Kong Stock Exchange. The non-GAAP financial measures we provide are for comparison purpose only.

Definitions of these measures and a reconciliation table are available in the news release we issued earlier today. As a reminder, this conference call is being recorded. In addition, an investor presentation and a webcast replay of this conference call will be available on the Bilibili IR website at ir.bilibili.com.

Joining us today from Bilibili senior management are Mr. Rui Chen, Chairman of the Board and Chief Executive Officer; Ms. Carly Li, Vice Chairwoman of the Board and Chief Operating Officer; and Mr. Sam Fan, Chief Financial Officer. And I will now turn the call over to Mr. Fan, who will read the prepared remarks on behalf of Mr. Chen..

1999 [Foreign Language] in May, demonstrating our strong distribution capabilities. Turning to our IP derivatives and others, previously known as e-commerce and others. Revenues for the first quarter were RMB510 million, a decrease of 15% year-over-year.

The decrease in revenue was mainly due to a proactive strategy shift to focus on increasing profitability. In the first quarter, margin for IP derivatives and others improved meaningfully by this approach and we expect it will continue to improve going forward.

Lastly, we recently published our 2022 annual ESG report which highlights the value we create and bring to young generations in China. We are committed to shouldering our social responsibilities, fostering a welcoming community for our users and creators, and working towards a sustainable future for all.

In summary, the actions we have taken are effectively improving our financial performance and operating capabilities, while we continue to grow our dynamic community. Throughout this year, we will further execute our strategy and continue to expand our gross margin and narrow our losses. This concludes Mr. Chen's remarks.

I will now provide a brief overview of our financial results for the first quarter of 2023 and our outlook for the year..

Total net revenue for the first quarter was RMB5.1 billion, flat compared with same period last year. Our total net revenue breakdown by revenue stream was approximately 43% VAS; 25% advertising; 22% mobile games; and 10% from our IP derivatives and others.

Our cost of revenue decreased by 7% year-over-year, driving our gross profit to RMB1.1 billion, up 37% year-over-year, while our gross margin was 22%, up from 16% for the same period last year. With our tightly controlled cost structure, we expect to show continued margin improvement throughout 2023.

Our total operating expenses were down 11% year-over-year and 31% quarter-over quarter. We are maintaining tight control of our expenses while we work to increase our commercial prospects. We cut sales and marketing expenses by 30% year-over-year, while our DAUs grew by 18% year-over-year.

As a percent of total revenue, sales and marketing was 17%, compared with 25% in the same period last year. G&A expenses were RMB572 million, up 7% year-over-year. R&D expenses were RMB1 billion, representing a 2% increase year-over-year. We expect to continue strict control of our operating expenses going forward.

Our net loss and adjusted net loss were RMB630 million and RMB1 billion, narrowing by 72% and 38%, year-over-year, respectively. Our net loss ratio in the first quarter was 12%, narrowed from 45% for the same period a year ago. Turning to our capital allocation and liabilities management.

We currently have three outstanding CBs that total US$1.6 billion. Among these, a total principal amount of $746 million of 2027 CB has an upcoming put rights which are exercisable through June of this year. As of March 31, 2023, we had cash and cash equivalents, time deposits and short-term investments of RMB19.4 billion, or US$2.8 billion.

We believe this amount is sufficient to cover all our remaining convertible -- CBs and fund our future operations, including the put rights on our 2027 CBs. With that in mind, we reiterate our expectations for net revenues for the full year of 2023 to be between RMB24 billion and RMB26 billion. Thank you for your attention.

We would now like to open the call to your questions. Operator, please go ahead..

Thank you. [Operator Instructions] Now, we're going to take our first question. And the question comes from the line of Daniel Chan from JPMorgan. Your line is open. Please ask your question..

[Foreign Language] I will translate myself. So, I have a question related to the user growth. So, we saw that -- we have -- under the situation that of lower sales and marketing expense in the first quarter, we actually have a sustainable growth of daily active user in the first quarter and higher DAU to MAU ratio in the first quarter.

So, could management maybe share a little bit on the future user growth outlook and also strategy? Thank you..

[Foreign Language] [Interpreted] Like I said on previous earnings calls, we have adopted a more quality oriented approach to user growth. And by quality, I'm specifically referring to DAU growth.

At this current stage, one of our top priorities is to improve the efficiency of commercialization, high-quality DAU growth and user engagement are the cornerstone of strengthening commercialization. This quality-oriented user growth strategy means that we have to pivot away from MAU to a DAU.

And over the last several quarters, we have achieved sales and marketing expense reductions while our DAU number continued to climb up. In Q1, sales and marketing expense was down by 30%, but our DAU increased by 18% to 93.7 million. So, compared to MAU, DAU is a better indicator of user engagement and commercialization potential.

And our strategy will continue to focus more on DAU going forward? And will you use this indicator to monitor our performance and drive up average user data time spent and DAU/MAU ratio. Building on a stable MAU, we now want to further improve retention and engagement.

In Q1 DAU to MAU ratio grew to 29.7% and average user daily time spent reached 96 minutes. Going forward, we expect to see further increase in the DAU to MAU ratio.

Going forward, I think Bilibili's business model is one of a virtuous cycle, because content creators, the content supply and the quality of content here means that we're able to attract high-quality users.

And the community here means that those users will stay and they will remain engaged, and then, that creates momentum for the content creators to generate even better content. So, this is like a virtuous cycle. That's why looking at our user growth trend, I think we'll be able to continue to grow our DAU in the future..

Thank you. Now, we're going to take our next question. Please standby. And the next question comes from the line of Yiwen Zhang from China Renaissance. Your line is open. Please ask your question..

[Foreign Language] My question is regarding advertisement. You delivered 22% Y-o-Y growth in ad revenue, which was faster than industry average.

Can you share more color on how we improved our ad products and efficiency? And what is our view on 2023 ads market? Correspondingly, what kind of strategy shall we adopt in this market? And then, lastly, recently, we observed many e-commerce explorations in either video format or live streaming format.

What is our [advantages] (ph) -- progress there? Thank you..

Star Rail in the initial two weeks is 3.7 times that of Genshin Impact for the same timeframe. And as a result, the game distribution and ad revenue are also higher than Genshin Impact over that same timeframe in the first week.

As for e-commerce, thanks to our data partnerships with Alibaba, PDD and JD, ad efficiency has improved meaningfully with Q1 revenue growing by more than 110% year-on-year during the June 18 shopping festival with a well-rounded marketing matrix, including Sparkle, branding ads, e-commerce and performance ads, we project that our revenue could potentially triple or even quadruple.

And for our verticals, electronics, FMCG and auto sector, we're confident that we'll be able to continue with the trend of healthy growth going forward. So, with regard to video and live broadcasting e-commerce, I think of it as incremental growth opportunities for both ad revenue and content creators' incomes.

This is the result of vibrant transactions in our community. Since last year, as all the other content platforms, we're building closed loop ecommerce systems, we have remained committed to building an open ecosystem that is connected with all the other e-commerce sites out there.

It is about shaping the users' mindset to view Bilibili as a place for shopping and to foster their capacity for transactions here. The performance in Q1 exceeded our expectations.

In Q1, there were over 10 million users placing e-commerce orders on Bilibili every day, and we also launched a dual performance product that facilitates both wish listing and transaction, which accounted for about 30% of performance ads in Q1. E-commerce is also a new income stream for content creators.

About 50,000 content creators engaged in e-commerce sales on a monthly basis in Q1, and there is now a smooth e-commerce workflow for categories such as cosmetics, food and electronics. Going forward, the momentum for consumption and transactions will get even stronger at Bilibili.

So, that's my take on how video and live broadcasting e-commerce will evolve on the platform.

Next question?.

Thank you. Now, we're going to take our next question. Just give us a moment. And the next question comes from the line of Lincoln Kong from Goldman Sachs. Your line is open. Please ask your question..

[Foreign Language] Thank you management for taking my question. So, the question is about the live streaming business. We've been seeing a relatively quickly growing our business for live streaming.

How should we think about the future strategy and outlook, especially in terms of the integration of live streaming and on-demand as well as the overall gross margin trend for the live streaming business? Thank you..

[Foreign Language] [Interpreted] We've always said that live streaming is a natural extension of our video ecosystem. So, operationally, we have always considered live broadcasting as the integral whole of our total operation.

So, live broadcasting and videos on Bilibili sometimes often target the same demographics and there was a lot of overlap in category as well. And a lot of times, the live broadcasters are video creators.

And last year -- since last year we have been focusing on the fusion and integration between live broadcasting and the videos so as to empower the live broadcasting business with momentum from the video ecosystem.

I think the success we have been able to achieve with live broadcasting is precisely due to the efforts we have put in to integrate video and live streaming ecosystems. In Q1, the number of video creators who also do live streams increased by 38% and 90% of new live streamers were either average users or video creators.

The video ecosystem is a source of vitality and content for our live streaming business. And in Q1, the number of active live streamers increased by 34% and the number of MPUs grew by 15%. That's how we are empowering live streaming through our video ecosystem.

So, Bilibili bodes very diversified categories of video content, and this has also contributed to the diversity of our live streaming content. One hallmark of that is our VTuber, which is -- Bilibili is now home to the largest group of VTubers in China. And this is a natural extension of our ACG content from the video side.

And today, VTubers are important source of income for live streaming. The VTubers are a very active group of live streamers on Bilibili. And with the help of AIGC, I think they will be able to generate even more vivid and lively images and content for the users and the whole experience can be more interactive for the users as well.

So, I'm personally very optimistic about prospects. And Bilibili also aims to be diversified and cover as many verticals as possible. And you wouldn't believe that, but lawyers and legal matters is a very popular category on Bilibili. Some lawyers, they also double as live streamers on our platform, answering legal questions to the viewers.

Sometimes they have to answer very insignificant, inconsequential, tiny questions, whatever the viewers want to ask them, and it's also something that Bilibili offers. Another example would be [golf] (ph). We have roughly thousands of golf players in China, and the vast majority of whom have already joined the Bilibili community as live streamers.

And even though it's a very niche hobby, they somehow ended up together on our platform. We even have a lot golf players from the province of Taiwan interacting with our users on the platform. These examples go to show that live streaming itself is very dynamic and diversified on Bilibili.

It's not just another revenue stream for us, it actually has a lot of content to offer and hold tremendous potential. And as our video business grows stronger and bigger, I believe our live streaming, live broadcasting business will also be able to expand and improve.

During previous earnings calls, I've said that live streaming business could potentially at least double. And I could say that again at this call, I believe live streaming has at least the potential to double at Bilibili, and the fusion between video and live streaming will continue to enhance.

Theoretically, every user can be a video viewer as well as the live stream viewer and every broadcaster can generate video content as well as live streaming content. And this is now also the important income stream for creators. In Q1, 700,000 creators were able to make the income from live streaming.

And fusion between videos and live streaming could also drive out our gross margin and reduce cost as more ordinary users are doing live streams on their own and the cost of bandwidth being spread out even further. We believe the gross margin for live streaming business will continue to improve. Thank you..

Thank you. Now, we're going to take our next question. Just give us a moment. And the next question comes from the line of Lei Zhang from Bank of America Securities. Your line is open. Please ask your question..

[Foreign Language] Thanks management for taking my question. Want to ask mainly about monetization of the content creator, which we noted that previously have some widely discussion on Internet. So can you share us more color on how we can improve either the total income or the commercial value for the content creators on Bilibili? Thank you..

[Foreign Language] [Interpreted] Well, I think you're referring to an article released in April about many -- the article claims that many creators on Bilibili stopped uploading new content to the platform. I read it myself, and I think this article is nothing but misleading.

And this article mentioned three content creators who paused their update -- paused their video content updates. Out of millions of content creators we have on Bilibili, the article mentioned only three. And two of those three actually have released new content since then.

And so, I think even though the article has a quite clickbait title, the content and the reasoning in this article was misleading. I think this article was able to start a heated debate. It's proof that people are paying attention to be Bilibili very closely, and some media even went down to write derivative reports on this article.

And that's why we -- and that discussion ended on the hot topic list of Weibo. And internally, we have been making a lot of efforts to improve commercialization for content creators at Bilibili and we have numbers to back that up. We have done a lot of work to help our content creators monetize.

In Q1 alone, 1.5 million content creators earned the income on Bilibili up by 50% year-on-year, and the amount they're making from advertising, live streaming and also user payment has also increased meaningfully. And in this article, it has also said that Bilibili is cutting incentives for content creation, which could have some ramifications.

This is again very misleading, because the incentive programs we have is only for content creators with fewer than 10,000 followers. Basically, we provide them the subsidy to help them tide over the initial period of content creation when they did not have the ability to generate an income for themselves.

And for content creators that have more than 10,000 followers, we help them find the tools to make money on their own. So, this incentive program doesn't really matter for the vast majority of the creators on our platform. Helping our creators monetize has always been a priority in our work.

We have established a Sparkle system to help content creators get commercial deals. We have also been empowering video creators to switch to live stream so that they can make an income there. So, this effort will never stop. We'll step up our efforts to help them make the income.

That's why -- that's because we believe only when those content creators don't have to worry about money, they will be able to invest more energy into generating high-quality content. So, this article is able to trigger such a discussion. And it shows that users actually care a lot about the creators and the Bilibili platform.

And the reason why we're able to have such a high concentration of high-caliber creators because we believe in the value of high-quality content and power of creators. This has always been and will always be a guiding principle in our operation.

We have always treated creators nicely because we understand their needs and we are going to spare no effort in supporting those creators and helping them earn an income that they deserve. This is a work we'll carry out continuously. Thank you..

Thank you. Now, we're going to take our next question. Just give us a moment. And the next question comes from the line of Xueqing Zhang from CICC. Your line is open. Please ask the question..

[Foreign Language] Good evening, management. Thanks for taking my question. And my question is mainly about the gaming business. You mentioned in the prepared remarks that Bilibili has some [mainly] (ph) approved games. So, can management share with us the gaming pipeline and what's [indiscernible] and outlook? Thank you..

1999 was published with great initial feedback. Many people are interested in our self-developed games. Two examples I mentioned just now are Alkaidland Records and Eruthyll, and we have more pipeline games under development.

But since self-developed games, we only want to be delivering high-quality games, so the cycle will be relatively long and each game will take about three years for development, and the next self-developed game will probably be published around the year after next. We will stick to the strategy of self-developed quality games and global distribution.

In terms of game genres, we will focus more on our forte such as ACG card games. Our goal is to develop top-ranking games in niche segments and manage them well over the long life cycles, and we're putting the hard effort needed to achieve that success on this front. Thank you..

Thank you. Now, we're going to take our last question. Please stand by. And the question comes from the line of Felix Liu from UBS. Your line is open. Please ask your question..

[Foreign Language] Thank you, management, for taking my question, and congratulations on the notable improvement on GP margin and overall bottom line. Can management elaborate a little bit on measures you have taken and your drivers for future GP margin and loss narrowing drivers? Thank you..

This is Sam. I will take your question. Our focus of this year is very clear, to improve the gross margin, in the same time we will reduce our net loss. So in the first quarter, our gross profit year-over-year growth grew about 37% and net loss narrowed considerably about 72% year-on-year and 58% quarter-over-quarter.

From the revenue side, we continue to improve the quality of the revenue. The advertising business, as we mentioned, grew by 22% year-over-year, so it's a high margin business. And at the cost end, we still improved our operational efficiency and achieved a year-on--year decrease of 7% of total cost.

And so that results the GP increase by 37% and the GP margin improved to 22% compared with 16% last year. So, use the technology upgrading and to operational management, the bandwidth cost, for example, continued to decline, down about 16% year-on-year and 12% quarter-over-quarter.

And the other fixed cost, for example, label and other operational cost also fell about [7%] (ph) year-on-year -- quarter-over-quarter. So from the expense side, you already saw the overall operating expenses decreased significantly, about 11% year-over-year and DAU increased by 18% year-on-year.

So, we will keep actively control our operating expenses, especially the marketing expenses, which are already down about 30% year-on-year in Q1. I think that will be -- that trend will continue in the following quarter. So, we are quite confident that we've controlled the cost and expense.

Our gross profit margin will improve quarter-over-quarter, mainly of this year. And the operating expenses will also show a meaningful year-on-year decline and to achieve a further narrowing of our net loss. Thank you..

Thank you. And that concludes the question-and-answer session. Thank you, once again, for joining Bilibili's first quarter 2023 financial results and business update conference call today. If you have any further questions, please contact Juliet Yang, Bilibili's Executive IR Director or Piacente Financial Communications.

Contact information for IR in both China and the U.S. can be found on today's press release. Have a great day..