Good day, and welcome to Bilibili Third 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 to Mr. Chen..

Mou Ding Tian Xia (San Mou). The game's initial performance reinforces our confidence in the longevity of San Mou. We will continue to roll out new content updates and gameplay to deliver better gaming experiences to users. San Mou's success shows the vast potential that lies within our game community.

We plan to leverage our unique game industry advantage to further explore other game opportunities in different genres. Meanwhile, we remain committed to bringing the best ACG titles to our users. Our legacy titles, FGO and Azur Lane maintained their popularity as they celebrated their eighth and seventh-year anniversaries, respectively.

In addition, we launched the Japanese RPG game, Jujutsu Kaisen Phantom Parade, Zhou Shu Hui Zhan, Ye Xingyun in overseas markets in November, which was well received. Turning to our advertising business. Our advertising business continued to outperform the industry in the third quarter.

Advertising revenues increased by 28% year-over-year to RMB 2.1 billion. Robust revenue growth in our performance-based ads was the largest contributor, increasing nearly 50% year-over-year in the third quarter. We also achieved decent year-on-year growth in brand and native ad revenues, reinforcing our strength in integrated marketing capabilities.

Our top 5 advertising industry verticals in the third quarter were games, e-commerce, digital products and home appliances, Internet services and automotive. As more and more e-commerce platforms recognize the commercial value of our unique young user base, they allocated larger advertising budgets to our platform.

We saw a particular up-tick over the summer vacation and back-to-school season, resulting in an 80% year-over-year surge in e-commerce advertising revenues. Meanwhile, we are also attracting more advertisers from emerging verticals.

In the third quarter, ad revenues from education, baby and maternity, and travel and lodging all grew by over 100% year-over-year. In addition, we continue to enhance our ad infrastructure to improve efficiency, and we have seen early benefits from these efforts.

For example, as we roll out a more user-friendly and effective ad placement system, the number of performance-based advertisers increased by over 40% year-over-year in the third quarter.

We plan to further incorporate AI technologies into our smart ad delivery system and launch a series of tools for ad material creation with higher efficiency and lower costs. These initiatives are expected to attract and retain more advertisers on our platform. Turning to our VAS business.

Revenues from our VAS business increased by 9% year-over-year to RMB 2.8 billion in the third quarter. This quarter, we welcomed the more users to join and enjoy our live broadcasting universe as we continued expanding our content offerings to meet their diverse interests.

Simultaneously, we remain focused on refining our operations to ensure sustainable business growth while improving margins. Our premium membership program grew steadily year-over-year, reaching nearly 22 million members in the third quarter. Over 80% of these members are on annual subscription or auto renewal packages.

Additionally, other VAS products experienced rapid growth. Fan-charging revenues surged by over 500% year-over-year during the quarter, demonstrating our users' strong willingness to pay for good content.

As we celebrate our first quarter of profitability, I want to thank our dedicated team, our loyal user community and our supportive partners and shareholders. Looking back over the past 15 years, we've made significant breakthroughs in our content offerings, expanded our user base and develop diverse commercialization products.

These efforts have helped build a unique video community with a one-of-a-kind user experience in a competitive industry landscape. Turning profitable is just a new beginning. Building on this milestone, we will continue to reinforce our business' positive growth cycle to drive sustainable profits in the future.

With that, I will turn the call over to Sam to share more financial details..

Thank you, Mr. Chen. Hello, everyone. This is Sam. I will now provide a brief overview of our financial results for third 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 third quarter, we greatly improved our financial profile. We accelerated our year-over-year revenue growth across our core businesses, continued expanding our margins and turned profitable on a non-GAAP basis. Total revenues for the third quarter were RMB 7.3 billion, up 26% year-over-year.

Our total revenue breakdown by revenue stream for Q3 was approximately 38% VAS, 29% advertising, 25% mobile games and 8% from our IP directives and other businesses. Our cost of revenues increased by 9% year-over-year to RMB 4.8 billion in the third quarter, while gross profit gross profit rose 76% year-over-year to RMB 2.5 billion.

Our margin reached 34.9% in Q3, up from 25% in the same period last year. The significant improvement in our gross profit and gross profit margin this quarter indicates the elasticity and potential of our business model. Our total operating expenses were up 2% year-over-year to RMB 2.6 billion in the third quarter.

Sales and marketing expenses increased by 21% year-over-year to RMB 1.2 billion, mainly due to increased marketing expenses for our exclusively licensed games. G&A expenses were RMB 505 million, which was relatively flat year-over-year.

R&D expenses were RMB 906 million, down 15% year-over-year due to a higher base of termination expenses for certain game purchases in Q3 last year. Our adjusted operating profit and adjusted net profit turned positive at RMB 272 million and RMB 236 million, respectively, marking significant gains from year-over-year losses.

Our adjusted net profit ratio in the third quarter was 3% compared with an adjusted net loss ratio of 15% in the same period a year ago. Cash flow-wise, we generated RMB 2.2 billion in positive operating cash flow in the third quarter and RMB 4.6 billion positive operating cash flow in the first nine months of the year.

As of September 30, 2024, we had cash and cash equivalents, time deposits and short-term investments of RMB15.2 billion or $2.2 billion. With a healthy cash balance, we announced a share repurchase program of up to $200 million for our for our securities the next 24 months, showcasing commitment to enhance shareholder returns in the long-term.

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] We will now take our first question from the line of Lei Zhang from Bank of America Securities. Please go ahead Lei..

[Foreign Language] Thanks management for taking my question and congrats on strong results. Since that Rui don’t speak English in the call for the first time, it's very well and pretty impressive.

My question is really high level, and I want to know management's strategic view on BILI after trading breakeven this quarter, what is our key focus in user and commercialization going forward? And how to strengthen our prediction in our redo industry? Yes, thank you..

[Foreign Language] So, actually, the English prepared remarks spoken by me was not really spoken by me, it's generated by AI. It's our self-developed proprietary index PDF model that only use 15 seconds of my speech during one of the event and generated that English prepared remark.

I was quite surprised when I first hear it, it was just sounded like me. And that shows the vast potential of the application could do for Bilibili, such as helping our content creators to make those narratives for engage better on a real time with their users. We are quite looking forward to further leverage that to our applications.

Indeed, this marks our very first quarter of adjusted profitability. And just now, I was receiving a lot of congratulations from friends and investors, but as a matter of fact, we do believe this is a natural outcome of the evolvement of our business model and expansion of the industry. And we just made it happen faster.

So before I get into futures, I would like to look back a little bit on where we stand right now and the logic that's driving our profitability. First of all, industry that we are in, the video industry is a very large market. And China itself is the largest and a low market. And video is large business.

And within that industry, Bilibili has built a very unique wine of a-kind PUGV community in China video market known for the high-quality video content, and we have secured that user mindset.

So when we are thinking about what is the highest, where to find highest quality of content or to find talented content creator, what's the go-to destination for mid- to longer lines of videos. Bilibili is always the number one brand name that pops up. And you can barely find, think of the number two in this market.

And because video is such a large market, and video will serve as the main media platform for this outlet, the brand awareness, the user mindset, that is as precious as gold. [Foreign Language].

Well, as the adoption of 4G, 5G network, our market has evolved from lack of supply of video content to -- from enough supply of video content. And from a user perspective, they have evolved from wanting to look at any video to wanting to look at high-quality video, unique video.

So in some instance, we are experienced an upgrade in content consumption in terms of video market. And riding on that trend, Bilibili has unique advantage, because we have that user mindset and brand awareness about those high-quality unique content..

[Foreign Language].

As we know that Bilibili has the highest density of Gen Z Plus cohort, the 90s, the 2000 generation, and because we have very high sticky user cohort and user retention rate, over the past 15 years, our user has stayed and grown with us. And the average age of Bilibili now has come to 25 years.

So 25, also means their commercial value is increasing every day. That's why we see this is an inevitable trend that our commercialization will accelerate, and it's a natural outcome of reaching profitability. And going forward, we think, there's vast potential for our commercialization to be unleashed..

[Foreign Language].

And in the future -- in the past, we have stated our focus will be focusing on community growth and our commercial growth. After reaching the profitability, our focus will remain unchanged..

[Foreign Language].

On commercialization, I'll share one thing that is we'll remain even more focused on the core business, such as games and advertising, because for those two business segments, they have higher market TAM and by its nature, it has higher gross margin and that will result in more efficiency in terms of our commercialization growth..

[Foreign Language].

And the success of our commercialization will also support the prosperity of our content ecosystem, and we have been pursuing that formation of the positive flywheel effect between quantity ecosystem and our commercialization growth.

As a matter of fact, in the first nine months of this year, leveraging our various commercial outlet, 2.7 million content creator has received income on Bilibili platform in those commercialization in one way of helping our content creator to realize their commercial value and hence, motivate their further and more content creation..

[Foreign Language].

And one thing I wanted to emphasize is that for Bilibili's commercialization outlets, it's more than just advertising because we are a comprehensive platform, and we provide more tool beyond advertising to help them realize their commercial value, establishing connection between their followers.

For example, on top of the native ad Sparkle advertising platform, we have our fan charging program. We also have cross studio to encourage content creators to monetize their scale, such as handcrafts and drawing and also premium courses to help them make money in various ways.

The profitability in Q3 is just a beginning, and we look forward to form a positive flywheel effect formed by our content ecosystem and commercialization growth. And the growth of our commercialization will, in fact, help the Bilibili to become an even healthier organization and achieve sustainable, profitable growth.

Next question, please operator?.

Thank you. Our next question comes from the line of Daniel Chen from JPMorgan. Please ask your question, Daniel..

So my question is on advertising, which is very strong. We have grown 28% year-over-year in the third quarter.

So what's the key driver behind the third quarter advertising growth? And also for the fourth quarter, do we see there is a change in the kind of macro environment for the advertising demand? And also lastly, how is our performance in the Double 11 festival for our e-commerce-related business? Thank you..

Bilibili's Q3 advertising revenue indeed was a good performance. It was reached close to RMB 2.1 billion and maintained a strong growth rate of 28%. And behind that performance-based ads grew nearly 50%, and this is helping us driving our gross margin and on a group level. [Foreign Language] In Q3, we continued our e-Home [indiscernible] strategy.

To be more specific on e-Home, that was more referring to the platform and structure -- infrastructure construction.

On first point, we released more ad inventory, while emphasizing on maintaining a good user experience, By maintaining a multiscreen, multi-scenario strategy, commercial inventory grow rapidly on our home page feed and story mode and also generate increased ad revenue across recommendations, search, PC, and even tablet platform in recent one to two quarters.

Looking forward, there's more potential for additional revenue from live streaming, video within video players, and also hot topic search. And on top of that, through a blend of organic and commercial traffic and native ad integration, more high-quality ads received more distribution effectively expanding our ad inventory.

At the same time, we have achieved content is good commercial and good commercial is a good content effect. The second point is that we further optimized our ad placement system. In the third quarter, the number of clients and mobile smart app placement increased by 700% year-on-year.

We will continue to improve our products and tools to make ad placement easier. Another example would be with the integration of Sparkle and our ad system, the proportion of Sparkle ads that engaged in ad promotion reached nearly 60% in Q3 and further demonstrating the effectiveness of our Sparkle Plus AKA ads promotion services model.

[Foreign Language].

The third point would be the launch of Creative Center and AIGC also now aided content has also improved our ad efficiency. We plan to roll out additional AIGC tools to help advertiser automatically create or modify ad materials, further lowering their cost and barriers.

And in Q4, we'll continue to enhancing our app placement experience, improving algorithm efficiency and we wanted to attract more new advertisers to Bilibili to create content to connect with our users..

[Foreign Language].

And the end zone refers to the industry vertical ad solutions and the top five ad verticals in Q3 coming from, number one games, number two, e-commerce digital products and online services as times automotive. In this leading or leading verticals that we have clear advantage we continue to expand our market share.

And one example on game sectors, apart from our experience genre in the sector, daily app placement for mini games sector increased by 200% quarter-over-quarter. In digital products and home appliances, we attract top tech brands like Apple, Huawei and Vivo to launch their new products on Bilibili.

In Q3, we captured more advertising brands during non-shopping festival periods, with e-commerce ad revenue up nearly 80% year-over-year.

Traditionally, we see e-commerce platforms to place more ads in the big shopping festival seasons, but in Q3, you are actually attracting more advertising budget during the summer vacation and the back-to-school seasons, reflecting the high value of our high-quality young audiences.

And Bilibili's brand advertiser for those e-commerce player, they saw the value in our platform as well as in our users. And while strengthening our advantageous categories, advertiser from more industries are choosing Bilibili.

In Q3, sectors like education, baby and maternity, travel and launching, et cetera, have all reachieved high growth, and we will continue to expand to more industry verticals..

[Foreign Language].

For the Double 11, we maintained our open-loop strategy, become a deep trusted partner for e-commerce platforms like Alibaba, Jingdong, Pinduoduo and VIP shops. GMVs from video and live e-commerce increased over 150% year-on-year, and participating content creators rose by 80%.

Among the customers we bring the to those merchant shops, new customer rates exceeded on average 50% across all sectors, including 3C and digital products, home decor, beauty and baby and maternity, et cetera. We have become the key source for new customers across all e-commerce platforms.

And this also helped us to achieve close 50% year-on-year increase in ad revenue during the Double 11 period..

[Foreign Language].

You mentioned -- asked about macro environment, how that bring changes to the advertising industry? Well, from our perspective, under the current macro environment, there is still some uncertainties in advertisers' budget, but the condition varies by industry -- different industries.

For example, sectors supported by the national subsidy policies such as the digital products and home appliances are seeing a strong recovery. And on food and beverage, healthcare and education are beginning to regain market confidence in a more gradual way.

While the budget remains tight in sectors such as automotive, beauty and fashion and real estate. Even though we expect short-term fluctuations across different industries, we remain optimistic and confident about the domestic economy in the mid to long-term.

[Foreign Language] Going back to Bilibili's advertising revenue, we remain confident that we can maintain faster than industry average growth rate for our advertising revenue in Q4 and further increasing our shares in this -- across all various industry verticals. That concludes Carly's answers. Thank you and operator, next question please..

Thank you. Next question comes from the line of Yang Liu from Morgan Stanley. Please ask your question, Yang..

[Foreign Language] Let me translate my question. My question is about the game business, which grow more than 80% in the third quarter.

My question is about the San Mou’s performance and what is the outlook and the operation planning in the future for this game? And also, I would like to hear management’s thought about user acquisition for this game, and also the future pipeline in Bilibili's game business and also the potential new genre’s [ph] in the future? Thank you..

Mou Ding Tian Xia now has entered in the stage of game Season 3, and we're about to enter into game Season 4. So based on what we've seen so far, we can proudly say that San Mou is one of the best-performing games in the China gaming market this year.

Besides the short-term performance, what I care the most is the longevity and sustainable operation of San Mou. And when I say longevity and long-term operation, I'm referring to at least five years, five to 10 years.

And to achieve the goal of long-term operation, we have made extensive plans in initial R&D phases and preparation in terms of the game design and operation strategy. Based on the performance of first three seasons, we can say that the user engagement level and retention rates are among the highest in this genre in the industry.

And the day after tomorrow, November 16, we will be launching the brand new game Season 4 and the new game season, we'll be featuring a new map characters and new star line gameplay. And we are quite confident with the new version content update will provide users with even more engaging and fun gaming experience.

And many of you might know that the San Mou has done a lot innovation and differentiation compared to the similar genre games. The reason behind that is from day one, we have collected many, many users' feedback from our closed beta testing to the latest Season 3.

We have welcomed feedback and actively engage with our users to listen to their advice and make adjustments based on their feedback. And we also got the reputation of the best game company that listens to the user's feedback. And based on those user feedback, we have proactively adjusted within our new brand -- new Season 4.

And going forward, the following seasons, we will continue to listen to our user and optimize and improve our games to give them best experience. So, when I say the longevity of this game, that gives my next year goal as the top priority will be continue to optimize San Mou's user experience and user engagement.

And for this particular strategy game genre, we'll be very focused on this one single title and because we also have a big team of developers and operators, we will be really focusing our best resources on optimizing this game.

And in the second half of this year, we will be starting to preparing for the international launch of San Guo starting with the traditional Chinese version, and we also look forward to bring this high-quality strategy game to the users worldwide. And the success of San Muo is a testament to the strategy of reinventing new games for young generations.

And we have succeeded in the strategy genre. And on top of the strategy and the ACG genre, next year, we'll be looking to explore a new genre and adapting our methodology of reinventing games for young generations through this new genre and hopefully can bring another new pipe to be Bilibili Game. [Foreign Language].

And in terms of the [indiscernible], many of you noticed, we have successfully launched the Jujutsu Kaisen international version globally, except Japan and China on November 7. And so far, we have achieved very good results. The game reached Top Downloading Chart number one, in more than 70 countries and regions.

And so far, the user feedback has been very positive. This marks a very successful attempt at our very first global distribution of ACG games. And for this particular gain in 2025, it will also be one of our important games to sustain and propel. Thank you. Our next question, please.

Thank you. Our next question comes from the line of Felix Liu from UBS. Please ask your question, Felix..

[Foreign Language] Thank you, management for taking my question. Congratulations on turning profitable this quarter. My question is more on the financial side.

So what is your GP margin and the profit margin outlook after you are successfully turning profitable this year -- sorry, this quarter? And also, we noticed that you announced share repurchase program. So how should we think about your shareholder reward scheme going forward? Thank you..

This is Sam. I will answer your question. In Q3, we not only met our previous committed breakeven goal, but also exceeded by achieving an adjusted of RMB 270 million. This result demonstrate the potential of our business model.

Our revenue in Q3 grew by 26% when gross profit was significant year-over-year increase of 76%, with the gross profit margin rise nearly 10 points from 25% to close to 35%. This improvement was mainly due to the increase of share of this high-margin game and advertising revenue, allowing the effective control of our fixed costs.

We believe that, with the continued growth of our tithing and gaming business, they are further down for long-term improvement in our gross profit margin. Additionally, it's worth mentioning that our operating cash flow reached RMB 2.2 billion in Q3 with the operating cash flow for the first three quarters reaching RMB 4.6 billion.

This indicates that our business is heading to a healthy positive cycle. That's also the background that we -- while we announced in our financial report US$200 million repurchase plan to be carried out over the next 24 months to increase our return to our shareholders.

Looking ahead to Q4, if you look at our deferred revenue balance, that balance in the end of Q3 increased by RMB 380 million quarter-over-quarter, laying solid foundation for Q4.

So we expect the revenue from gaming and advertising business to maintain a strong growth momentum, with further quarter-over-quarter improvement in gross profit margin and deliver further improved non-GAAP operating income. That's it..

Operator, next question, please..

Thank you. We will now take our last question from the line of Lincoln Kong from Goldman Sachs. Please ask your question, Lincoln..

So thank you management for taking my question. My question is about more the macro policy. Since end of September, we have seen quite a big shift in terms of those policy and more stimulus coming.

So from the company's business level, have we seen any incremental better trends in terms of advertising, gaming, live streaming or user paying propensity? Thank you..

[Foreign Language].

From a business perspective, we are very pleased to see a series of positive economic policy being introduced. We view this policy as highly encouraging signals that reflects the government's commitment to economic growth.

And recently, we also -- we felt the government's attention to private sectors and its determination to improve the business environment ourselves..

[Foreign Language].

While some of these policies are still in the pipeline and might take time for their effects to materialize, but we think it's just simply a matter of time as the overall direction has been set and clear..

[Foreign Language] Well, Bilibili is part of the platform economy and the platform economy is a key part of the broader economy in China. So when the overall economy improves, Bilibili will undoubtedly benefit from that improvement.

Well, of course, as a company, we will be paying more attention to our own development, specifically on the path we achieved community and profitability growth, commercial growth, and we are planning for our next year and the year afterwards. We wouldn't factor in the overall economy will improve drastically.

We'll be focusing on how we -- what we can do to improve our own business model to improve our product to give better content to our visitors.

Well, Bilibili has always been known for focusing on the long-term sustainable, healthy development and because our users are also beyond generation, so I'm very much looking forward to the landing of those stimulation policies that can bring the company user and this is tied to a better future. Thank you. Operator, that concludes today's call.

Thank you. you..

Thank you. And that concludes the question-and-answer session. Thank you once again for joining Bilibili's third 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..