Bilibili Inc

NASDAQ:BILI

Earnings Call Transcript 2018-Q2

[Operator]

Good day and welcome to the Bilibili 2018 Second Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Juliet Yang, Senior Director of Investor Relations. Please go ahead.

[Juliet Yang, Senior Director, Investor Relations]

Thank you, operator. Please note that discussion today will contain forward-looking statement statements relating to future performances of the company and are intended to qualify for Safe Harbor from liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performances and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company’s control and could cause actual results to differ materially from those mentioned in today’s press release and this discussion. A general discussion of the risk factors that could affect Bilibili’s business and financial results as included in certain filings of the company with the Securities and Exchange Commission. The company does not undertake any obligation to update this forward-looking information except as required by law.

During today’s call, management will also discuss certain non-GAAP financial measures for comparison purpose only. For our definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the 2018 second quarter financial results news release 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 Investor Relations website at ir.bilibili.com.

Joining us today on the call 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. Sam Fan, Chief Financial Officer.

And now, I will turn the call over to Mr. Fan who will read the prepared remarks on behalf of Mr. Chen.

[Sam Fan, Chief Financial Officer]

Thank you, Juliet and thank you everyone for participating in today’s second quarter earnings call. I am pleased to deliver today’s opening remarks on behalf of Mr. Chen. We are proud of another solid quarter with strong top line growth and continued user expansion. Total revenues for the second quarter reached RMB1 billion representing an increase of 76% year-over-year. Each of our core business contributed to those games, with growth across our games, advertising and live broadcasting and the value-added services settlements. The key to our success is the active growth of our community. Our average monthly active users grew by 30% year-over-year or 7.6 million quarter-over-quarter, reaching 85 million in the second quarter. Mobile MAUs grows even faster, increasing 39% year-over-year to 71 million. The strong growth momentum trend in the second quarter continued as we entered the summer, where we achieved record high MAU of 98 million in July beyond our expectations.

While we do expect to see some one-off impact to our new users acquisition in August based on our APP download being temporarily suspended from certain APP stores in China from July 26 to August 25, our overall user engagement and user retention rates remains high. We are in the process of implementing content monitoring, including a self inspection and increasing the number of our content order percentile. We will continue to work closely with relevant government authorities on an ongoing basis to improve the management and operations of our business. With our APP being full restored in all APP stores on August 25, we are actively exploring ways to attract new users and we are confident in our ability to resume our user growth momentum going forward.

Content remains the cornerstone of our business. We will continue to attract and engage users with a variety of content in a broad array of categories. Entertainment, lifestyle, games, anime and the technology were the top 5 most popular content categories during the second quarter. Our users on average spent 75 million daily on Bilibili, excluding time spent on Bilibili mobile games. Our vast pool of talent, content creators continued to be the driving force in video content creation. During the second quarter, 89% of our viewed videos came from professional user generated video, or PUGV. Beginning this year, we initiate a number of programs to provide better, more layer support for our content creators, specifically, in tottering, cash incentive and [indiscernible] to new, mid and top content creators. These initiatives are designed to further expand our cycle of highly skewed content creators, while simultaneously supporting our current pool of creators, encourages them to stretch the boundary of their imaginations.

Furthermore, to better serve mobile users, which account for 84% of our total MAU, we introduced the new mobile-friendly functions such as mobile content submission as well as pool adoption for content that is in a vertical fall. These efforts yielded a number of year-over-year gains in the second quarter, including a 91% increase in the number of average month active content creators, a 131% increase in their content submissions and 117% increase in the number of content creators with over 10,000 fans. In addition to PUGV, we are strengthening our content offerings by building high-quality license content to our community, primarily in anime and documentary. Our business model enable us to not be solely relied on license content to attract users, but rather to use it as addition to enhance our content ecosystem and monetization capabilities.

Notably, our self-produced documentary series fund was an instant success after its release in June generating over 36 million views. Other license content such as anime and drama are also being well received by our users and have become the primary driving force of our premium membership program. As of the end of June, we had over 2 million subscribers to our premium membership services, this model is working and we will look to bring a number of other high-quality content to our community in the coming quarters. We are also expanding our footprint in the e-sports area as the third most popular content vertical of our platform, high-quality gaming content, particularly e-sports related content is attracting more and more users.

As of the end of 2017, we formed our e-sports club for the Bilibili Gaming, or BLG, along with our [indiscernible] which holds one of the 14 sports in Tencent’s League of Legends Pro League, or LPL. We also owned the live streaming rights to all LPL matches. In the first half of 2018, we had accumulated over 800 million paid views for all LPL related live streaming. We have also formed players, no battleground team and team with the goal of providing more games to our users and very important, our leading position as a principle game content creator in China.

Turning to the second pillar of our business community, over the years, we have natural encouraged and engaged community environment. This is one of our most distinguishing attributes setting us apart from other video platforms. We continue to see a growing trend of engagement and stable retention rate as we improve our AI and Big Data powered recommendation efficiency. Social functions such as module growth, Bilibili moments enable users to engage and interact with their friends and favorite content creators in a much easier and a dramatic way. In the second quarter, our users on average generated over 310 million daily video views and 640 million monthly interactions to bullet chats, comments, likes, Bilibili moment posts. The number of official members who pass our 100 question test continues to grow reaching 38 million in the second quarter, representing a 44% increase year-over-year, with an 80% 12-month retention rate. Our official members are even more loyal and engaged than our non-official members, leveraging our strategic initiative, engaging content and vibrant community. We are confident in our ability to continue to attract and retain more users.

With that overview, I would like to take a few moments to review operations within each of our core businesses. Revenues from our mobile games grew 31% year-over-year to RMB791 million led primarily by the rapid popularity of Fate/Grand Order or FGO and Azul Lane. FGO’s growth continued to be stable and we are excited to celebrate the game’s second anniversary in this September followed by major content updates planned for November. We have also successfully renewed exclusive license agreement for FGO with Aniplex, so that we can continue to provide more exciting content to all of our players.

Turning to our pipeline of new games, on the exclusive license game front, besides some of the games we have previously discussed such as BanG Dream, A3! and Wu Fa Chu Peng de Zhang Xin, we are delighted to announce that we are growing two more highly rated ACG games to our users, Princess Connect, [indiscernible] RPG and an exciting RPG based on the well-known IP. Given each of these games success in Japan, we are confident they will have winning performance in China as well. In addition, we will exclusively publish the [indiscernible], a high-quality domain based mobile game based on our popular anime and jointly published the Legend of Heroes, [indiscernible] a classic IP-based RPG. On the jointly operated gaming front, we look forward to bring a number of highly anticipated ACG games to market, including Shining Nikki, Arknights, One Pace and Data Live. We are also pleased to announce we will soon be rolling out Ark [ph] order, a domestic ACG in coming months.

Looking at our advertising revenues, this increased by 132% to RMB96 million or $50 million year-over-year supported by our attractive platform of immersive content user interaction and our highly generation fee user demographic. We expect to see continued growth in brand advertising and well add our feed ad, which is starting to show early progress as we ramp up the number of kinds and add low ratio. In the second quarter, revenue from performance-based advertising contributed over one-third of our overall advertising revenue. We believe our advertising business is still in the relatively early stages of monetization and has great growth potential.

Our live broadcasting and VAS revenues increased by 186% to RMB190 million or $18 million year-over-year, representing 12% of the total revenue. These offerings are prevalent to support continued increase in the number of paying users. And as I mentioned before, during the second quarter, our growth focused on premium membership program, our average monthly paying users reached 3 million, a 177% increase year-over-year. These positive trends continued to be encouraging demonstrating our monetization potential. As the year progresses, we plan to rollout more premium content and further improve the user experience for our growing number of paying users. Quality and community remains at our core. Diversification and expansion will be among our chief initiative to further grow our content and reach as many users as possible with a variety of interests. This is in these ways we believe we can further strengthen our monetization capacities, while continued to grow our business and add value to our robust community of users, content creator partners, partners and the investors.

This concludes Mr. Chen’s comments. I will now provide a brief overview of our second quarter 2018 financial results. During the second quarter, we continued to see robust growth in all three of our premium business lives. Our total net revenue increased by 76% to RMB1 billion or $155 million year-over-year. As we wrap up our monetization effort, we are delighted to see more diversified revenue contribution from advertising and live broadcasting and value-added services, which account for 21% of our total revenue in the second quarter of 2018 compared with 14% from the same period of last year. Cost of revenues increased by 74% to RMB776 million or $170 million from the same period of last year. Revenue sharing cost, our primary component of total revenues was RMB470 million or $63 million, representing our 84% increase year-over-year.

Gross profit increased by 82% to RMB251 million or $338 million from the same period of last year. Total operating expenses increased by 88% to RMB348 million or $54 million from the same period of last year. This is important to note that second quarter and third quarters are our peak user acquisition times. These types of seasonalities include increased spending on selling and marketing. With that in mind, selling and marketing expenses were RMB128 million or $90 million, representing a 146% increase year-over-year. This increase was primarily attributable to the increase of channel and marketing expense associated with our APP promotional expense for our mobile games and then increasing cash in selling and marketing personnel.

G&A expenses were RMB98 million or $15 million representing a 30% increase year-over-year. RMB expenses were RMB132 million or $20 million, representing a 108% increase year-over-year. This increase was primarily due to increased headcount in engineers reflecting our continued invest in improving our production efficiency. Loss from operations was RMB107 million or $16 million compared with a loss of RMB43 million in the same period of last year. Income tax expense was flat year-over-year at RMB2 million or $400,000. Net loss totaled RMB70 million or $11 million for the second quarter of 2018 compared with RMB50 million in the same period of last year. Adjusted net loss, which mainly excludes share-based combination expenses and amortization expense related to intangible assets acquired through the business acquisition, was RMB20 million or $3 million from RMB40 million in prior year period.

Basic and diluted loss per share was RMB0.26. Non-GAAP basic and diluted loss per share was RMB0.07. As of the end of second quarter, we had cash and cash equivalents as well as time deposits of RMB3.6 billion or $548 million compared with RMB765 million as of December 31, 2017. As we look forward, our financial goals are to continue improving our monetization efficiency by further growing our business. We are currently projecting net revenues for the third quarter to be between RMB1 billion and RMB1.04 billion.

Thank you for your attention. We would like to now open the call to our questions. Operator, please go ahead.

[Operator]

Thank you, sir. [Operator Instructions] Our first question comes from the line of Mr. Alex Yao from JPMorgan. Your line is open.

[Alex Yao, JPMorgan]

So I have two questions. Number one is how to think about the user growth outlook for second half considering you guys did pretty good job in terms of the user growth in July, but then also there is a recent suspension for APP downloads in domestic and Android apps to work? And then second question is about the new game launch timetable you talked about a lot of new game developments in the prepared remarks, how do you think about the timetable for new game launch given the new game monetization approval has been suspended in China for 5 already? Thank you.

[Rui Chen, Chairman and Chief Executive Officer]

Okay. Let me just translate the first part. Mr. Chen’s has had in his view that the second half the user growth trend outlook is very positive that can be reflected in our Q2 results, MAU result as well as our July performance, you achieved 98 million MAUs in July and that is driven by our improved content quality and our user experience and a strong demand from our users. Okay. So the temporary suspension of APP downloads will have a little impact on our August new user acquisition, but it won’t affect the overall trend of our Q3 and the overall second half user trends. So in July, given that we are short for 5 days due to the temporary suspension, we still achieved 98 million MAUs, that’s a very, very good result and beyond our expectation. Our APP download has been fully restored on August 25 in all APP stores in China and we are actively exploring ways and activities to capture the last wave of the summer vacation traffic and we see it’s working quite well. Okay. So we forecast the August MAU will definitely be higher than the June MAU and the overall average monthly active user in Q3 will be over 90 million. So from our previous data, normally Q4 will be slower than Q3, but because of the temporary suspension in the summer and other new user acquisition strategy that we are undertaking we think our Q4 MAU should be equal or even larger than Q3 MAU. So for the licensing permit situation, Alex mentioned, we believe that this industry wide temporary problem we are facing and we believe it’s just a short-term delay. Still although that temporary suspension have certain impact to the whole industry regarding the second half game launch schedule, but we believe there is still a huge pent-up demand from the Chinese gamers, we are forecasting that once the issue is reserved, there will be increasing demand for new games. So, relating to the pipeline that we discussed during the script, those pipelines are the highest quality titles that we select from over thousands of games and we chose the best performance one and we believe all those games should perform quite well in China and it’s for all of the imported and domestic games, especially for the Japanese games that we are going to license their performance in Japan market will be a strong investment for their performance in China. So during the waiting period, we are actively preparing a tons of solutions to provide new games, for example, we are going to bring our exclusively licensed game order, ACG game that’s already being permitted in coming months to our users. Including what Alex just mentioned about the green channel, we are also actively preparing for that. So actually from early this year we have been preparing all of this approval process we have 4 games that’s already complete. All of this pre-approval process is just waiting for the permit that includes BanG and Wu Fa Chu Peng de Zhang Xin. That concludes Mr. Chen’s comment.

[Sam Fan, Chief Financial Officer]

And let me explain about user acquisition cost and selling and marketing expense trend, overall we will spend more in the third and fourth quarter that’s mainly because usually the peak time for us to acquire new users in summer. And especially in Q3, we will spend more to catch up the new users acquisition momentum after our APP has been resumed in all APP stores and we will also organize some offline anime events, such as Bilibili war and attend a lot of very hot anime events offline and we will also prepare for the second anniversary celebration of FGO in September. We estimate that we will spend on average spend about 15% of our total revenues on selling and marketing in the second half of this year and more budget will be shifted into Q3 in order to make sure our strategy can work and another component of our selling and marketing staff related cost for our advertising business and that kind of cost will be increased with advertising business. So that will be the trend for selling and marketing in the second half of this year.

[Juliet Yang, Senior Director, Investor Relations]

Operator next question please.

[Operator]

Thank you, ma’am. Our next question comes from the line of Marcus Yang from Macquarie. Your line is open sir.

[Marcus Yang, Macquarie]

Thanks management for taking my questions. I guess, just a follow-up on the capital removal events, so can you quantify the impact from this removal of events, I mean, the revenue guidance now suggest 37% to 40% year-on-year growth and how should we look like without these events? And maybe also in our cost expense and expense perspective I understand that you may add more staff for auditing for instance. So, that’s my first question. And I guess my second question is with regard to your advertising business, last time I recall that you are planning to increase your app loads and ECPM etcetera and has that started to contribute from second quarter or any updates on that progress will be appreciated? Thank you.

[Juliet Yang, Senior Director, Investor Relations]

And Marcus, do you mind translating that into Chinese?

[Rui Chen, Chairman and Chief Executive Officer]

So overall, there will be certain impact for the new user acquisition in August related to the temporary APP removal, but we think overall revenue growth trend as well as user growth trend will not be impacted by this temporary removal. During the period of suspension, we have contact approval of acquisition ratification process, but doubling auditing team plan was not just simply to dealing with this suspension, but it’s actually related to our actual business involvement, our new content recognition is increasing very rapidly and we were going to increase the headcount of our auditing team and we are just expediting this process.

[Sam Fan, Chief Financial Officer]

Yes. Just to add two points, one we will double our current auditing team member – the member of our current auditing staffs, so basically we estimate that the income will be around RMB5 million in the second half of this year. And as we mentioned before we are spending more on the selling and marketing team in August and the September in order to catch out acquisition momentum. And I think Mr. Chen can add more color on the advertising business.

[Rui Chen, Chairman and Chief Executive Officer]

Our advertising revenue growth momentum is very positive. As has been showed on our Q2 earnings report, the performance based advertising which was just launched early this year is already contributing over one-third of our advertising revenue. Okay. So continuing with the performance-based advertising, we have launched two large scale of new agency recruiting conference in end of March and the beginning of June and that help us to recruit and increase the number of advertising agencies who are representing Bilibili. Actually, in Q2, the number of advertising agencies grew over 100% quarter-over-quarter. This growth not limited to the number growth, but we are also expanding our coverage in multiple industries and that is also helping our conversion and revenue growth. We are also optimizing our algorithm and our strategy to improve the click-through rate. So as you may know to increase performance-based advertising revenue, there are several metrics that grows a number of advertising agency and the quality of advertising agency as well as the algorithm and a recommendation policy as well as the app loads. What we are doing and improving in Q2 was mainly focused on increasing the number of advertising agency and the quality of advertising and improved our algorithms and Big Data capabilities, not so much on increase of app load. On the brand advertising front, we are also expanding our customer base and improving our brand influence in the industry where we think we have improved our overall strategic planning marketing as well as integrated marketing capabilities for brand advertisers in the second quarter.

[Operator]

Thank you. And that concludes the question-and-answer session. I would like to turn the conference back over to management for any additional or closing comments.

[Juliet Yang, Senior Director, Investor Relations]

Thank you, operator and thank you once again for joining us today. If you have further questions, please contact myself, Juliet Yang, Bilibili Senior Director or TPG Investor Relations. Our contact information for IR in both China and the U.S. can be found on today’s press release. Have a great day.