Good day, and welcome to Bilibili Second 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 the SEC and Hong Kong Stock Exchange. The non-GAAP financial measures we provide are for comparison purposes only.

The definition of these measures and a 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 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. 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 (San Mou) and ACG game Articrafter. Our legacy titles also contributed steady game revenues and demonstrated remarkable longevity. As FGO celebrated its eighth anniversary, it returned to the top 10 on the iOS game grossing chart in July.

As for Azur Lane, monthly active users reached a new peak in June with the celebration of its seven-year anniversary. These trends strengthened our commitment to the long-term operation of high-quality games. We were delighted to see our first strategy game, San Mou, become an immediate blockbuster.

On the first day of its launch, it ranked in the Top 3 on the iOS game-grossing chart, attracting millions of gamers to the three kingdoms’ battlefields. San Mou also set a new record in our operating history, being the fastest title that hits RMB1 billion game grossing mark.

With the launch of the second game season on Aug 3rd, San Mou returned to the Top 3 on the iOS game grossing chart. The decent size of the SLG market, the early success of San Mou and the long lifecycle nature of SLG games give us confidence that it will become one of our flagship games with enduring longevity.

Over the years, our community has expanded exponentially and so has our gamer base. San Mou's success marks a breakthrough in our genre diversification strategy and shows the vast potential of our games business.

We will continue leveraging our leading role as a top gaming community and capitalizing on significant opportunities to reinvent games for the new generation of gamers. Turning to our VAS business. Revenues from our VAS business increased by 11% year-over-year to RMB2.57 billion.

We continued to add more live broadcasting content offerings, reinforcing the synergies between our live broadcasting and PUGV ecosystem to better cater to users' diverse interests.

We will also further explore opportunities in our other VAS businesses as our Gen Z+ users have demonstrated an increasing willingness to directly pay for the content they love.

Our premium members continued to increase, reaching 22.3 million by the end of the second quarter, with over 80% of them subscribing annually or under auto-renewal packages, showing their continued loyalty and trust in our platform.

User spending on our other VAS products also grew rapidly in the second quarter, particularly in premium courses, our fan charging program and avatar decoration. We expect these products to open more monetization potential across our massive PUGV content universe in the future.

We believe good content and community can bring people together, and the value of our users is just starting to show its potential. Our community is thriving, and our solid second-quarter results place us just one step away from profitability. We are excited to move forward and take Bilibili to the next level. This concludes Mr. Chen's remarks.

I will now provide a brief overview of our financial results for the second quarter of 2024. For a closer look at our financial results, we encourage you to refer to our press release issued earlier today. As a reminder, all amounts are in RMB unless otherwise noted.

In the second quarter, we further advanced our commercialization capabilities, delivering accelerated year-over-year revenue growth across our core businesses. At the same time, we continued to expand our margins and considerably narrowed our losses. All of these financial improvements were founded on our topline growth with increased efficiency.

Total revenues for the second quarter were RMB6.13 billion, up 16% year-over-year. Our total revenues breakdown by revenue stream for Q2 was approximately 42% VAS, 33% advertising, 17% mobile games and 8% from our IP derivatives and other businesses.

Our cost of revenues increased by 5% year-over-year to RMB4.3 billion in the second quarter, while our gross profit rose 49% year-over-year to RMB1.8 billion. Our gross profit margin reached 29.9% in Q2, up from 23.1% in the same period last year. Our total operating expenses were down 3% year-over-year to RMB2.4 billion in the second quarter.

Sales and marketing expenses increased by 13% year-over-year to RMB1.0 billion, mainly due to increased marketing expenses for the new game launch. G&A expenses were RMB488 million, down 10% year-over-year. R&D expenses were RMB895 million, down 15% year-over-year, both related to reduced headcount expenses.

We narrowed our adjusted operating loss and adjusted net loss to RMB284 million and RMB271 million in the second quarter, reducing our losses by 69% and 72% year-over-year, respectively. Our adjusted net loss ratio in the second quarter came down to 4% from 18% in the same period a year ago.

Cash flow-wise, we generated a record RMB1.75 billion in positive operating cash flow in the second quarter, and a total of RMB2.4 billion in positive operating cash flow in the first half of the year.

As I mentioned earlier, driven by the strong performances from our games and ads businesses, our deferred revenue balance at the end of Q2 also increased by RMB738 million from the end of Q1, paving a solid path to achieve our non-GAAP breakeven target next quarter, and sustainable profitability thereafter.

As of June 30, 2024, we had cash and cash equivalents, time deposits and short-term investments of RMB13.9 billion, or $1.9 billion. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead..

[Operator Instructions] Your first question comes from the line of Daniel Chen of JPMorgan. Please ask your question..

[Foreign Language] Thank you for the opportunity to ask question. So my question is on the advertising. We have -- we see that the ad advertising growth in the second quarter was very robust, growing about 30% year-over-year, which is very strong.

So, could you maybe share the key driver behind? And also how should we expect the advertising growth for the second half? Thank you..

[Foreign Language] In a challenging macro-environment, Bilibili's second-quarter advertising business achieved a 30% year-on-year growth with quarterly revenue exceeded RMB2 billion for the very first time and contributing about one-third of the company's total revenue.

[Foreign Language] As you can see that our advertising revenue has growth for several consecutive quarters and the fundamental reason behind that is one that Bilibili's traffic is growing very healthily. And secondly is that, we are continuously unlocking the commercial value of our users.

[Foreign Language] Bilibili’s DAU grew by 6% year-over-year in the second quarter, while our video views increased by 18% year-over-year, showing a continued growth in our commercial traffic. [Foreign Language] Over 70% of China's young generations are using Bilibili and the average age of our user has reached 25.

This is a stage where their consumption needs and spending power are rapidly growing and being released. [Foreign Language] This is evident from the booming growth in our consumption-related content categories.

In Q2, video views in the categories such as home decor and real estate, automotive, fashion and beauty all increased by over 30% year-over-year, while daily video views in baby maternities experienced a year-over-year growth of over 80%.

[Foreign Language] On top of that fundamental reason, what we need to do is to match the demand between advertiser and users with better infrastructure and industry-based marketing solutions.

[Foreign Language] And the one horizontal refers to the enhancement of platform infrastructure and the multiple verticals refers to the vertical industry-based app solutions. [Foreign Language] In the first half of this year, we implemented comprehensive upgrades to several of our advertising infrastructure modules.

For example, we upgraded the placement platform on our PC and provided one-stop placement tools for KA accounts. And as such, in the first half of this year, the number of performance-based KA advertisers increased by 50% year-over-year.

[Foreign Language] In terms of app materials, our newly launched creative center and active application of AIGC technologies helps our advertisers to diagnose and improve their ad materials after optimization the CVR achieved over 30% year-over-year improvement. [Foreign Language] Now, let's take a look at our industry verticals.

In Q2, our top-five advertisers came from mobile games, e-commerce, digital products, and home appliances, food and beverage and automotive sectors. [Foreign Language] I'll talk -- take a closer look at the e-commerce and transaction-based sectors.

With our consistent open-loop strategy during this year's June 18 Shopping Festival, we have deepened the integrated marketing and advertising collaborations with e-commerce platforms as well as secured a larger share of e-commerce merchant budgets.

[Foreign Language] During the June 18th period, the number of advertisers on Bilibili increased by over 30% -- 300% year-over-year and our GMV from live and video commerce increased by over 140% year-over-year.

[Foreign Language] 50% of the customers that we brought to the merchants in different verticals were new customers and specifically for baby and maternity sector, we bought over 60% of the new users to them.

[Foreign Language] On our transaction-based advertising in the first -- in the second quarter that nearly 40 million users have watched our live and video e-commerce-related content and this number increased by 70% year-over-year.

[Foreign Language] In Q2, the average daily content creator engaged in live and video e-commerce increased by over 130% year-over-year and the number of commerce-related videos grew by over 330% year-over-year. [Foreign Language] And the number of live e-commerce sessions rose by 270% year-over-year.

[Foreign Language] The consumption potential of Bilibili's female users, which constitutes near half of our communities is also gradually unlocked. GMVs in apparels increased over four times year-over-year in the second quarter. [Foreign Language] We've talked about the second quarter and its driver behind.

And if we look -- take a look into the second half of this year, we're quite confident in maintaining an above-industry average advertising growth rate. [Foreign Language] On one hand, the outcome of product infrastructure optimization is being proved and will continue to show its effects.

And on the other hand, by enhancing our vertical industry solutions, we not only expand our market share in key industries, but we are also looking to achieve incremental growth in emerging industry verticals such as online services, education, healthcare, and baby and maternity.

[Foreign Language] Lastly, I wanted to emphasize that because we have our unique community aspect, Bilibili's revenue growth was never just being relied on advertisement growth.

We can pursue to be M2C parallel strategy in our commercialization efforts, meaning that we can not only earn money from advertisers, we can also earn money directly from our consumers.

[Foreign Language] Because we are community, our users are more inclined to spend on content or spend on content creators that they love to show their support and appreciation.

[Foreign Language] To sum up, we will be pursuing a B2B and 2C parallel strategy on the one hand, we'll continue to reinforce our advertising platforms to drive the advertising growth.

At the same time, we still believe there is great potential in our 2C business, meaning on mobile games, premium membership, live broadcasting combining together will support our sustainable revenue growth. Operator, next question, please..

Thank you. One moment for the next question. The next question comes from Felix Liu of UBS. Please ask your question..

Mou Ding Tian Xia. Could management share more drivers for the game's successful launch? And what are your expectation of the game's lifetime cycle? And looking ahead, what are the future genres that you plan to further expand or invest in the future? Thank you..

[Foreign Language] The San Mou game indeed is a blockbuster in the first half of this year. We not only attracted millions of new players, we've also accumulated very good user feedback and also have large influence among the gaming industry. [Foreign Language] The game San Mou broke several records in our game operation history.

Shortly after its launch, it quickly ranked among the top three on the IOS game top-grossing chart and maintained in Top 10 for the entire month afterwards. And San Mou also became the fastest gain in Bilibili's operation history to reach RMB1 billion in revenue.

[Foreign Language] Since last year, we've been emphasizing the importance of operating one game and extended time for a longer period of time. And for San Mou especially, the SLG genre is a perfect game genre for long-term operation. And starting from August 3rd, we launched the game's second season.

As of now, the performance of Season 2 reflects gamer's sustained enthusiasm and good retention rate and this has given us very strong confidence to make this as an evergreen title.

[Foreign Language] Many people have asked me why San Mou would work? How we picked this game? I think this is a result of our continuous effort in the strategy of making new games, reinventing games to cater into the younger generation. We actually saw this game back in 2022 and we also invested in the development team in 2022.

This -- the success of the game is not by accident. It's under long period of time of thinking and strategy and decision-making. [Foreign Language] Starting from 2019, our MAU grew by over 200%. And as we expand, our gamer circle also continued to expand. They included more than ACG gamers. They are gamers. They love multiple different categories.

[Foreign Language] Five years ago, when we only had 100 million MAUs, the most condensed gamer profile would be ACG lovers. But as we evolve into a bigger community with 340 million MAUs, what we cover of our gamer community goes way beyond just than ACG. They love SLG and many other content categories.

[Foreign Language] There are large number of potential SLG players within the community who are generally interested in content categories such as history, militaries, social and science, and arts and knowledge, those are very, like, those demographics fits perfectly with the SLG potential audiences.

[Foreign Language] SLG is a very large market based on our observation of the existing products in the market. We estimate that there were tens of millions of users who have tried SLG games and they're -- and for this group of people there mostly dwell or active on Bilibili.

[Foreign Language] As we discover those factors, we have established this project. We named this co-project code name as NSLG, meaning New SLG. [Foreign Language] We've discovered that in the current market, there are many players pain points haven't been addressed.

At the same time, the current SLG game offerings in the market does not fully satisfy the young generation's needs in SLG. So we believe as we're making more innovations and addressing their pain points, addressing their involving needs, we could be successful and the success launch of this game has proven, our strategy has been right.

[Foreign Language] This success behind San Mou, we will credit to the overall trend of the immersive -- immense opportunity that lays behind reinventing games to catering beyond generation needs. This not only adjusts to the SLG categories, it could apply to multiple categories and we will continue to explore in that direction.

[Foreign Language] As for the estimation on its life-cycle, we believe that SLG by its nature has longer life circles. [Foreign Language] We've noticed that our -- SLG games in the market has been operating for eight years and five years.

[Foreign Language] We have set the internal target of making San Mou at least a five years -- more than five years game. [Foreign Language] And it all boils down to whether the company focused on making a game into its -- a longer life-cycle, longer operation. We have to focus on the longevity of the game. The industry has evolved rapidly.

This is no longer a time where everybody can make fast money. We are committed to be the top game, who respect our users the most, who listen to our users the most, and we hope to make this game an evergreen title. Okay, thank you. Next question, please..

Thank you. One moment for the next question. Next question comes from Thomas Chong of Jefferies. Please ask your question.

[Foreign Language] Thanks management for taking my question. My question is related to the trend in our content offerings. As average age for Bili ecosystem already reached 25 years old, can management share about the development of our content strategies and our content categories outlook as well as the consumption trend going forward? Thank you..

Wukong's related content. This number shows that we have continuously -- that the interest-based content verticals. [Foreign Language] We've always said that the evidence to show a community's competitiveness is the ability to continuously produce good and new content.

And we think we have already proved that over the past 15 years, Bilibili has the ability and the power to continuously expand its content offerings horizon and content categories. Thank you.

Operator, next question please?.

The next question comes from the line of Xueqing Zhang from CICC. Please ask your question..

[Foreign Language] Thanks management for taking my question. My question regards on our financial outlook. The company delivered continued margin expansion and a robust cash flow this quarter.

Could management share with us the outlook for the financials in the second half of 2024? Looking at the third quarter, we will breakeven or make a profit, and what's the mid-to-long term profitability outlook? Thank you..

This is Fan. Let me take your question. Our financial performance in the second quarter demonstrates our business model has great potential for increasing the gross profit margin. In Q2, our overall revenue grew by 16%, while gross profit increased significantly by 49% year-over-year.

The gross profit margin increased nearly 7 percent points year-over-year from 23% to nearly 30%, the eighth consecutive quarter of margin improvement. This was primarily due to our ability to control costs and achieved rapid revenue growth.

With the continued growth, our high-margin advertising and game business, there's still substantial room for further improvement for our gross margin. Additionally, it is worth noting that our operating cash flow for the first half of the year with RMB2.4 billion and our free cash flow reached [RMB1.5] (ph) billion.

This indicate that our business has entered into a positive cycle. Looking ahead to our financial performance in Q3, we see that the deferred revenue balance increased by over RMB770 million quarter-over-quarter, laying a good foundation for the third quarter revenue growth.

We expect the revenue from our games and advertising business to maintain strong growth momentum, along with a significant quarter-over-quarter growth in gross margin. At the same time, in addition to achieving our initial growth of breakeven in Q3, we now aim to achieve meaningful operating profit on a non-GAAP basis.

Meanwhile, we, we are delighted to see solid growth across our core business lines. Our growth momentum, along with the prudent cost and expense management will lead us to continue expanding our revenue scale and profitability in 2025 and resulting in ongoing improvement in our operating margins..

Thank you. Next question, please..

Thank you. The next question comes from Yiwen Zhang from China Renaissance. Please go ahead..

[Foreign Language] So thanks for taking my question. My question is regarding AI application. Can management discuss about how can we apply AI here via multiple user scenario of Bilibili and is there future potential? Thank you..

[Foreign Language] It is known that Bilibili has the most extensive and highest quality AI content across the Internet. I think the reason behind that is most of our user receive higher-education background and they are based in a first and second-tier city, who are curious.

[Foreign Language] And based on our internal data that for the first half of this year, on average -- on monthly average over 80 million of users are watching AI-related content on Bilibili. And for those AI-related content, not just one word or 15 second headlines, many of those content has extensive professional content, in-depth discussion in AI.

[Foreign Language] That results in three, the most AI platform for Bilibili. First most is that we believe we have the most user who are general -- genuinely interested in AI content. And second most is, we have the most AI professionals active on Bilibili.

Lastly is over 90% of the domestic AI companies have set up accounts and get in touch with Bilibili users on Bilibili. [Foreign Language] Because the high concentration and condensity of AI content and user give us natural advantage and explore AI application.

And as a platform, generally, we see many of the user initiate their attempt in connecting AI with their content creation.

Back in 2023, there was a user who used the AI tools to mimic a famous singer's voice singing songs in their -- in her original voice and that actually triggered the original singer to come out and say this, she support this type of creation and welcome user to use it.

[Foreign Language] And for this year we've noticed many AI-powered music creation, AI-powered animation, AI short plays were being released on Bilibili. Our operation team has even made an AI short play competition and attracting a lot of users to participate.

[Foreign Language] And in terms of our own content creation tools, we have leveraged and implement AI and our AI creation tools. We believe essentially the application will help to improve the content creation efficiencies for our existing content creators and also allowing regular users to leverage this tool to become a content creator themselves.

And this is very beneficial from a content supply perspective. [Foreign Language] And we also use AI directly to enhance our user experiences. As of now, we have opened the AI Assistant and AI Search to all of our users because we have a large amount of knowledge-based review-based content.

You can ask our AI Assistant or AI Search to summarize the keywords and key messagings of videos. And this is very helpful and efficient for a user who wants to get a quick summary of our content. [Foreign Language] And there are two more examples of our AI tools, one is AI Translations.

Our AI Translation tools can help to translate many different languages such as the Tibet content -- a content creator from Tibet and they spoken in their local language and our AI Assistant can help him to translate into Mandarin. And we also have a tool called AI Assistant.

While playing a video, if you don't have time to watch the whole thing, you call upon the AI Assistant, the AI Assistant will summarize into a short articles to tell you what this video is about and the overlay to outline the key points of that video, all of which we believe will effectively help our user to improve their user experience.

[Foreign Language] We always believe that AI should be a technology that benefits everyone, including users and platforms. And I believe that development of AI requires a joint effort of multiple numerous companies to reach its full potential rather than a company doing -- researching AI within itself in a closed loop.

So as a platform, we always take a very proactive and open attitude. We are already working with several leading domestic AI companies on various fronts. And we believe that with our joint efforts, we can bring user better experience. And for those partners, they can also unleash their full potential and value with Bilibili and our users.

[Foreign Language] And as many of you might notice that, our AI generated video capabilities is through our partnership with a leading AI company and we expect to continue risk collaboration with various partners. And through this partnership, we aim to bring better and more efficient and more creative experience to our users..

Thank you. That concludes today's answering session..

Thank you. Thank you once again for joining Bilibili's second 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 or 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..