Good day and welcome to Bilibili First Quarter 2024 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 SEC and the Hong Kong Stock Exchange. The non-GAAP financial measures we'll provide are for comparison purpose only.

The definition of these measures and our reconciliation table are available in the news release we issued earlier today. As a reminder, this conference 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’s Senior Management are Mr. Rui Chen, Chairman of the Board and Chief Executive Officer; Ms. Carly Lee, Vice Chairwoman of the Board and Chief Operating Officer; and Mr. Xin Fan, Chief Financial Officer. I will now turn the call over to Mr. Fan, who will read the prepared remarks on behalf of Mr. Chen..

Mou Ding Tian Xia, on June 13. Over 2 million players had already pre-registered as of today. We also plan to launch a Japanese RPG title, Heaven Burns Red [Foreign Language], in the third quarter. Last but not least, as we make progress on commercialization front, we are actively shouldering our social responsibilities as a cultural enterprise.

We published our 2023 annual ESG report last month, outlining our efforts in creating and bringing value to young generations in China. Collaborating with content creators, employees and industry partners, we strive to explore more technological innovation and engage in social welfare activities to positively impact society at large.

This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the first quarter of 2024. I'd now like to review our first quarter financial highlights. For a closer look at our financial results we encourage you to refer to our press release issued earlier today.

Our commercialization and operational efficiency enhancement initiatives continued to yield great results in the first quarter. We improved the quality of our revenues, expanded our margin for the seventh consecutive quarter and significantly narrowed our losses based largely on our revenue growth and platform efficiency.

Total revenues for the first quarter were RMB5.7 billion, up 12% year-over-year. Our total revenues breakdown by revenue stream for Q1 was approximately 45% VAS, 29% advertising, 17% mobile games and 9% of our IP directives and other businesses.

Our cost of revenues increased by 2% year-over-year to RMB4.1 billion in the first quarter, while our gross profit rose 45% year-over-year to RMB1.6 billion. Our gross profit margin reached 28.3% in Q1, up from 21.8% in the same period last year. Our total operating expenses were down 2% year-over-year to RMB2.4 billion in the first quarter.

Sales and marketing expenses increased by 5% year-over-year to RMB927 million, mainly due to early promotion expenses related to the release of our upcoming SLG game. G&A expenses was RMB532 million, down 7% year-over-year. R&D expenses were RMB965 million, down 6% year-over-year.

We cut our adjusted operating loss and adjusted net loss to RMB512 million and RMB456 million in the first quarter narrowing these losses by 52% and 56% year-over-year respectively. Our adjusted net loss ratio in the first quarter improved to 8% from 20% in the same period a year ago.

For the first quarter, we also generated RMB638 million in positive operating cash flow, demonstrating our business ongoing healthy path for sustainable development. We expect to reach positive non-GAAP operating profit in the third quarter of 2024 through our sustained top-line growth, as gross profit margin improvement.

As of March 31, 2024, we had cash and cash equivalents, time deposits and short-term investments of RMB12.9 billion or $1.8 billion. In March this year, we completed the repurchase right offer for our April 2026 notes.

After completion of this transaction, the aggregate outstanding principal amount of April 2026 notes, 2027 notes and the December 2026 notes was $433 million. We believe our cash position is sufficient to cover all of our remaining convertible bonds. Thank you for your attention. We would now like to open the call to your questions.

Operator, please go ahead..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Thomas Chong of Jefferies. Please go ahead..

[Foreign Language] Thanks Management for taking my question. My question is about our online advertising business. Given advertising growth exceed our expectation, can management comments about the key growth driver. One of the areas that we have strengthened in our ad product offerings and our ad technology upgrade.

On the other hand, if we look into the Q2, in particular for June 18th, can management comment about the advertising trend and how we should think about 2024 advertising outlook? Thank you..

[Foreign Language].

Our ad revenue in Q1 reached RMB1.67 billion, up 31% year-over-year. Among them, performance-based advertising saw strong growth, exceeding 50% year-over-year. Speaking of the key driver, one of the driver is that while maintaining a good user experience, which we care a lot. We increased our overall advertising inventory.

We further expanded our ad scenarios such as Moment and Search. And in addition by mixing the natural and commercial traffic, high-quality advertising content can gain more organic traffic resulting in an increase in effective ad inventory.

Having said that as we increase our effective ad inventory, our ad load is still low and have significant room to expand compared to other platforms..

[Foreign Language].

Second growth driver is that we have integrated our Sparkle ads in our advertising system as well as to improve our ad placement tools. We have enabled and achieved smart ad placement in different app scenarios. In Q1, over 50% of the Sparkle ads also purchased our content promotional service, AKA project takeoff [CFA] (ph).

We also launched a creative center to enable bulk processing of ad materials. And also we believe the continuous exploration of AIGC related function can help us to improve our ad efficiency..

[Foreign Language].

And secondly on our content creator side, we've launched our content promotional tools for content creator. Project takeoff now has been officially upgraded to a new product called [Bi Huo] (ph), which was made available to all content creators in Q1.

The function allows content creator with one-stop service to promote their content through paid traffic amplification they can also increase fans and improve their monetization capabilities.

The number of clients who purchased our content promotional service in Q1 increased by 190% year-over-year, while the repurchase rate and the satisfaction rate continues to improve..

[Foreign Language].

And thirdly, we have optimized our marketing data infrastructure and improved our algorithm efficiency. We refined various commercial-techs to provide advertisers with more comprehensive measurement and guidance on branding and marketing outcome.

Currently, we have already launched a trial version of our B Data and Z Index for advertisers in games, mobile phones and cosmetics. We expect Q3 and Q2, we'll push it out to more industry verticals..

[Foreign Language].

And the fourth growth driver is that we have deepened our vertical industry solutions. In Q1, games, digital products and home appliances and e-commerce platform are our top three growth factors, with grocery [fee] (ph) around high double digit year-over-year.

In the gaming sector, we have focused on high-quality games covering all stages in their game operation from pre-launch to long-term operations. Notably, we have captured our incremental shares in mini games market resulting of 50% increase in daily ad spending.

And on digital and [finances] (ph), we already took over about 10% of the market share in smartphone app market. And in the future, we believe there is still significant growth potential for other digital products and home appliances. And we move on to the e-commerce platforms, for this quarter, we have achieved diversified customer structure.

Besides the traditional partner, Taobao, Jingdong, Tmall and Pinduoduo, we have expanded our collaboration with Vipshop, Kuaishou and [Xiaohongshu] (ph). We improved our ARPU during our non-shopping festival period and introduced additional budget with key -- other key active merchants.

And we do expect those advertising budget from merchants will continue to drive our advertising growth. As to sum up, we do expect we can replicate that ad solution and apply to more additional verticals, including Automotive, Internet services, Health Care and Education Industries.

Meanwhile, we will continue to expand to more clients with more industries..

[Foreign Language].

And you asked about our June 18th performance, we do expect or we estimate the growth during June 18th shopping festival this year will be around -- will be over 30% year-over-year. And we have further increased our shares of advertising budget at this significant shopping festival.

This year, we'll continue to execute our open-loop strategy, establishing deep partnership with Alibaba, JD, Pinduoduo and Vipshop and others. Additionally, we also have two upgrades in our strategy. First is that we will upgrade our partnership from pure profit collaboration to traffic plus content collaboration.

Brand advertising revenue is expected to increase by 40% year-over-year during this period. This year, Taobao also introduced a new budgeting targeting total GMV from purchasing Sparkle plus content promotion. And JD is also actively engaging in our integrated marketing activities combining both traffic and content value strategies.

Secondly is that we will transition from platform to platform collaboration to platform plus merchant collaboration. Platform budget for June 18, will be expected to increase by 30% year-over-year, while the merchant budget is expected to increase significantly over 250% year-over-year.

We will strengthen the collaboration with more vertical industries that encourage more consumption-related behavior from product seeding to purchasing transition during the period..

[Foreign Language].

Speaking of the June 18th shopping festival, let me briefly touch on some of the data points that reflects the current situation on Bilibili. So first of all is that, we've noticed the consumption willingness among Bilibili users have further improved.

In Q1 the number of users who watched transaction-related content has reached over 37 million, nearly doubling year-over-year. And we believe our users have more mindset and perception towards watching commercial or e-commerce-related content on our platform.

At the same time, our content creator are benefiting from this improvement, content creator has received income or generate revenue through live and video commerce also increased over 100% year-over-year. And we believe there is a lot more potential for us to further get into.

And for the transaction-related advertising sectors, the top four industries in terms of transaction volumes are digital products and home appliances, food and beverage, apparel and beauty and cosmetics. And to sum up, we remain very confident to maintain a high growth rate for our advertising for the full year. Thank you.

Operator next question please..

Thank you. Next question comes from the line of Lei Zhang from Bank of America. Please go ahead..

Mou Ding Tian Xia. Thank you..

[Foreign Language].

So Bilibili has always have the largest and the most high-quality game-related content library, at the same time, we have the highest density in terms of high-quality gamers. This gives us a great advantage in the gaming business..

[Foreign Language].

one is stable; and two is we're looking for new things..

[Foreign Language].

Stable is referring to that Bilibili is paying a lot of attention to our legacy classic games. We expect to achieve a very long-term operation, maintaining the stickiness of our gamers and also to see continuous innovation in terms of content.

We have witnessed that for the gamers in our legacy games, their retention level and engagement level has increased continuously at the same time showing a very robust longevity..

[Foreign Language].

FGL, one of our most popular [indiscernible] games, have entered -- has already launched for 8 years. And for this year, during its April content upgrade, this game has returned to the top iOS grossing chart. As for [indiscernible], it's also a seven years old game.

And for the 7th year anniversary should happen just now in May, this game once again returning to the top 10 grossing charts on iOS as well..

[Foreign Language].

And from Bilibili perspective, to operate these tested games by -- for a longer period of time, it's return for us, it's even better than thinking new games. So what we plan to do is continue to do -- refine our operation, maintain a long life cycle.

As an FGL player myself, I can see that FGL has become part of my life, and I will continue to play it if the game is there. So we are confident we can continue to operate this game towards its 10 year anniversary or even longer..

[Foreign Language].

Crafter, we think this game's performing so far has met our expectations and will contribute to our game revenue in the second quarter..

[Foreign Language].

Mou Ding Tian Xia you were asking. For this game, we already set the launch date at June 13..

[Foreign Language].

And for this game, who already has over 2 million pre-registration users, and we have done multiple rounds of paid, nonpaid beta testing as has received a very good feedback from the gamers..

[Foreign Language].

Mou Ding Tian Xia game, actually, we signed this -- we have signed this game the year before last year. The reason behind that is not -- it's not a spur of moment is that we have discovered on Bilibili.

There's a big demographic who are interested in topics history, military, political knowledge, as you know that knowledge has been a very big content category on Bilibili. So to satisfy this group of users or potential gamers' needs, we have signed this SLG game. So far, the feedback has been very positive and showing that the strategy is working..

[Foreign Language].

So as we set up the target on SLG strategy, we have worked together with the game developer to conduct many innovations in the games. As you know, that we have a massive Gen-Z users. For this group of users, their preferences towards SLG has evolved compared to the older generation.

They value a lot of the gameplay and the fund and the gameplay over the competition the battle itself. And also they care about whether it requires to top up a lot of money and spend a lot of time on the game. So on this field, we have -- we have targeted solutions and to improve this gameplay. So far, the user feedback has been very positive..

[Foreign Language].

And those two examples shows our strategy and thinking in terms of the game business innovation and long-term strategy. As a matter of fact, Bilibili is the biggest game content community, has the largest game related-video library. So we'll continue to focus on this track and aim to bring more high-quality games to our users.

Operator next question please..

Thank you. One moment for the next question. Our next question comes from the line of Xueqing Zhang from CICC. Please go ahead..

[Foreign Language] Thanks management for taking my question. My question is about user engagement. The company's first quarter time spent hit a new high and the average daily really also achieved good growth. So what's the main driver behind that? And which content categories are expected to have great potential in the future? Thank you..

[Foreign Language].

So as a matter of fact, Bilibili has its own content categories that are very advantageous compared to other platforms and users have a strong mindset of looking for that type of content on Bilibili. This includes knowledge, ACG, tech and digital products and et cetera. And users -- and for this type of content categories, users have hardcore needs.

They naturally want to watch this type of content. As long as we stay competitive, they continue to enhance our leadership in this category, we will experience natural traffic growth. For example this year that we are looking at the technology, tech, knowledge and game sector for this sector VV has increased 37%, 28% and 24%, respectively..

[Foreign Language].

As we enhance our leadership [counting] (ph) categories, we're also actively forming new categories. For example, our average age -- the average age of Bilibili user is already 24 years or so for some of the demographics, by theory, there their children could be around one year old.

So we've seen naturally seeing those content consumption needs rises, including baby maternity, automotive and home appliances, et cetera. For example, in Q1, video views in baby and maternity grew by over around 100%, and we're also seeing strong growth for automotive and home appliances, home decorations..

[Foreign Language].

At the same time, for this emerging content categories, we are naturally attracting more content creators to join our platform, forming a virtuous cycle..

[Foreign Language].

So in the first quarter, our overall community has delivered a strong growth. Our DAU grew by 9% and our video views grew by 22%. The daily average user time spend has reached our historical high of 105 minutes.

This all demonstrating our strategy of content development and community operation is very effective, and we will continue to execute this strategy and to achieve sustainable growth going forward. Operator next question please..

Thank you. One moment for the next question. Our next question comes from Felix Liu from UBS. Please go ahead..

[Foreign Language] Thank you management for taking my question and congratulations on the good GP margin performance in the first quarter. May I check what specific areas you did well in cost control? How do you see the mid-long-term margin outlook, as well as the third quarter profitability target, if any update to that? Thank you..

Thanks Felix, this is Fan, I will take this question. In Q1, our total revenue grew by 12% when cost of revenue only increased by 2% year-over-year. So our gross profit increased by 45%.

And thanks for the improved operational efficiency, our non-GAAP operating expenses decreased by 2% year-over-year and 8% quarter-over-quarter, which lead to further loss reduction. Our path to profitability is mainly driven by the revenue growth and the continuous growth profit improvement, which we believe is more sustainable.

Specifically, the gross profit margin has increased reaching like 28% in Q1. The main reason for this improvement contributed by the high-margin business, such kind of our [asset] (ph) revenue, which increased by 31% increase year-over-year. And now the sales mix has come to like 29%.

Based on the current business development trends, we expect that in Q2 and Q3, with the continuous rapid growth of the advertising business and the recovery of our game business that will resume year-over-year growth.

Our gross profit margin will further improve quarter-over-quarter and to reach 30% gross profit margin in Q3, and we were achieving non-GAAP operating breakeven in Q3. We are quite confident to achieve that. In the longer term, the gross profit margin will depend on the scale of the revenue and the mix of the each business line.

We still believe there is great potential there. Meanwhile, achieving breakeven is just our first step, we will allocate more resources on enhancing our commercialization efficiency while continuing to refine the operational strategies to achieve sustained improvements in both of the gross profit margin and the net profit margin.

Thanks for the question. Next question..

Thank you. Our last question comes from the line of Lincoln Kong from Goldman Sachs. Please go ahead..

[Foreign Language] So thank you management for taking my question. So my question is about the paying users business. So we see the company is now close to 30 million paying users.

So on top of the traditional subscription membership, we have also successfully launched the value-added service such as content creator charging, paid courses or community decoration. So how does the company think about the prospects of this community-based content payment business? Thank you..

[Foreign Language].

So Bilibili has always been an interest-based video community and Bilibili user has three key characters, one high retention level, high engagement level and high ARPU. And because all the users have strong sense of belonging towards our community and also have a sense of belonging towards the community.

It all makes content, pay for content is a natural monetization matter for Bilibili..

[Foreign Language].

On our premium membership business, at end of first quarter, we have close to 22 million premium paid members. And this interesting number is that 80% of them chose a long-term commitment payment, AKA, the monthly automated subscription or yearly subscription. This is what sets us apart from the regular content platforms..

[Foreign Language].

So on top of the traditional broadcast and premium membership, we have continuously explore more business model to better combine our community and content. This includes the premium courses, charging station for our content creators as well as the cosmetic custom business.

And users generally will gain more experience and feel better after paying for this type of service. At the same time, they can also express their liking, appreciation towards their favorite content creator or their favorite IP. At the same time, our content creator can gain a new avenue of monetization.

This is forming a virtuous growth cycle for our community..

[Foreign Language].

In Q1, the premium membership, premium courses, charging as well as the community costumes, combined together their total revenue is already close to RMB1 billion. First is on the premium courses.

On top of the traditional professional courses our courses covers a wider category including live skill set, interest-based knowledge, even relationships is more diversified. And the premium courses has already become a primary and important avenues for our content creator and the knowledge sector to monetize.

In Q1, the number of content creators that gain revenue from the premium courses has grew by over 450%. And their -- the overall revenue also increased by 45% year-over-year..

[Foreign Language].

And secondly is that we have upgraded our charging program recently to extend into exclusive fan charging videos. In Q1, the number of content creators that received income from the charging project has increased 47% year-over-year. And the total GMV of the charging program has increased 125% year-over-year.

An example would be one of our content creator name [indiscernible], over the past six months, he released four episode of high quality documentaries. And at end of the first half of May, his GMV has exceeded RMB10 million.

And from this case, we do think that, in many new areas, such as the short play, short documentaries and short movies actually has great potential and we are quite excited about on Bilibili..

[Foreign Language].

In the second half of this year, we plan to systematically review and upgrade our value-added services, including those content services. We are quite confident for this part of the business will continue to bring additional revenue and help our content creator to gain more revenue. Thank you. Operator, that concludes this question..

Thank you. And that concludes the question-and-answer session. Thank you once again for joining Bilibili's First Quarter 2024 Financial Results and Business Update Conference Call today. If you have any further questions, please contact Juliet Yang, Bilibili's Executive IR Director of Piacente Financial Communications.

Contact information for IR in both China and the US can be found on today's press release. Thank you, and have a great day..