Bilibili Inc

NASDAQ:BILI

Earnings Call Transcript 2019-Q2

[Operator]

Good day, and welcome to the Bilibili 2019 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 of Investor Relations]

Thank you, operator. Please note that discussion today will contain forward-looking statements relating to the company's future performances and are intended to qualify the Safe Harbor from liability as established by the U.S. Private Securities and 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 in this discussion.

A general discussion of the risk factors that could affect Bilibili's business and financial results is 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 a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial results, please see the 2019 second quarter financial results news release issued earlier today.

As a reminder, this conference call is being recorded. In addition, an investor presentation and a webcast replay of this conference call will be available on Bilibili's Investor Relations website at ir.bilibili.com.

Joining us today on the call from Bilibili senior management are, Mr. Rui Chen, Chairman of the Board and Chief Executive Officer; Ms. Carly Li, Vice Chairwoman of the Board and Chief Operating Officer; and Mr. Sam Fan, Chief Financial Officer.

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

[Sam Fan, Chief Financial Officer]

Thank you, Julia. And I thank you everyone for participating in today's earnings call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. I'm happy to report that on June 26, 2019, we celebrated Bilibili's 10 years anniversary. Over the past decade, we have grown from a small personal size to a leading online entertainment platform. We've over a 100 million active users come together to provide and share their interests.

We attribute our success to our constant focus on PUGB content ecosystem and community involvement which form the foundation for continued high quality growth. Looking into the next 10 years, we are charged, we are accelerating this growth. We plan to achieve this in two ways, more proactive user growth and improved commercialization efforts. We are proud to deliver another remarkable period of growth in both our user base and top-line.

Importantly, our second quarter results demonstrate the type of high quality user growth we are aiming to achieve. We added 9 million MAUs to our community of subscription on quarter basis. This is a highest net add since 2017 bring our total MAUs to 110.4 million including 30% year-on-year. Within this group, our mobile MAUs once again grow faster than our MAUs and were up 35% year-on-year reaching 96.2 million. High quality user growth has always been a key focus for Bilibili. The young accelerated growth, we're continuously improving the activities and engagement for our user community. In the second quarter, our total DAUs outpaced our MAUs growth rate and grow by 41% year-over-year reaching a record 33.2 million.

Our users are also spending more time on our platform. Averaging 78 minutes per day upstream minutes compared to the same period last year. And we moved into our peak summer season, we are seeing this healthy trend continued. Therefore, we raise our MAU target from the range of 110 million to 120 million to the range of a 120 million to 130 million for this year. And the set up a new target of reaching 220 million MAUs by 2021. The fast pace for our user compared with the quality of this user is viewing our top-line expansion.

We continue to convert more visitors to paid users by offering premium content and the unique community experience. In Q2, our average month paying users more than doubled compared with the same period last year reaching over 6.3 million. Revenue per MAUs increased by 15%; non-game revenue per MAUs increased by a 102% year-over-year. And that without our revenue reached RMB1.54 billion between the high end of our previous guidance targeted at RMB1.49 billion.

What's driving this remarkable growth of both user numbers and the revenue comes back to the three pillars of our organization. Content, Community and Commercialization. I'd like to touch on each of these area, provides an insight into our growth strategy. And I talk about the performance within these matrixes for the second quarter.

First and the foremost content, content is the paramount of attracting user at a rapid pace and keeping them engaged. We have strategically positioned our less competitive track when we enjoyed growing of high-quality content through our POGV ecosystems at a relatively low cost. Leveraging Bilibili's high content platform and the unique community environment. We continue to attract talented content creators and grow our content offering.

During the second quarter, we had an average of 854,000 active content creators uploading 2.4 million videos monthly. This represents the year-over-year increase of a 144% and 107% respectively. To better support and motivate our content creators, we are continuously improving our product. Two, an alternative to make content creation easier.

Our mobile content submission functions allow our content creators to create content anytime anywhere. Our newly launched interactive video tools create a brand new fun way for [territory] and are very easy to use. We are also actively promoting video blog, and went after content format to express creative ideas. So far it is gaining good traction with both content creators and users.

In addition, our cash incentive program continued to encourage over a 160,000 content creators by providing a monetary reward for their original and a high-quality creation. As a supplement to our vast POGV content library, we continue to expand our OGV offering by acquiring premier content and important IP that can be monetized across the entertainment spectrum. As an example of this at the end of June, we applied exclusive animation adaptation rights to the award-winning Scipy, The Three-Body Problem, one of the most renowned Scipy IPS in China.

We assumed to bring these exciting tales to life in a variety of entertainment form including animation, mobile games, comics and audio drama. Through this adaptation plan, we aim to maximize the reach of the story and the return on our investment. In the self producing and co-producing department, we are delighted to see our self produced and IP on the titles gaining traction. Our signature food documentary series, the Story of Troy welcomed in second season in July and was mass hit. Our co-produced talk-show, In Formal Talk and self-produced an animal reality show, Animal Hospital was also well received by our users.

Notably, the content verticals we choose enjoy relatively lower production cost, while attracting a broader population of users. They can also yield considerable revenue through advertising and various commercial opportunities. Second, let's look at our community and we welcome more members in our community and continue to see deep levels of engagement and interactions among user. In the second quarter, we have 586 million daily views, up 84% year-on-year. On the engagement front, our user's generated 1.8 billion interactions monthly through Bili chat, comment, live and Bilibili moment of host, up 180% compared with the same period last year.

In addition to engagement level, the number of official members and the average retention rate are also important data point that is representing the quality of our user growth. At the end of second quarter, we had 54 million official members who passed our 100 passing event, up 40% year-over-year. Their 12-months retention rate remains at about 80%. This official member tends to be the most active and engaged with both our content and each other. They are also more willing to pay for premium content.

We will continue to improve our products and content offerings to convert more official members to paying users. Last but not least, commercialization. Our Gen Z content user base has a much stronger willingness to pay for our entertainment services than any other generation. According to the latest request mobile report, around 60% to 80% of the paying users who pay for mobile games, live broadcasting and the online videos in China are Gen Z. Our business model is the large to address entertainment and the interaction needs of these important population.

Beside traffic, we can monetize our user's entertainment preference through mobile game, live broadcasting, advertising and other value-added services. As we ramp our monetization efforts, we believe our user growth will -- and even higher top-line growth.

Now let's first take a look at our game business. Using our massive base of game lovers and highly engaged community, we have become one of the largest game communities in China covering PC, mobile, console and [inner game]. We continue to add more games to our portfolio and improve our distribution efficiency. In the second quarter of 2019, revenue from our mobile games rose 16% year-over-year to RMB920 million, led primarily by Fate/Grand Order, or FGO and the blockbuster ACGC in the mobile games [Arknot] which we release in May. Being the exclusive jointly operator of Arknot on NGO channels in China, we helped us attract over 3 million co ACGC users to the game.

The success of Arknot also had shown the market increasing demand for ACG game. More importantly, it is a strong testimony to Bilibili's robust distribution power for high quality game. On the exclusively licensing front, we have released a number of new titles in recent months. These include Japanese music RPG pandering in May and excited domestic RPG final care in July and a highly rated female [romance RPG untouchable town] in August.

All three titles have gained great traction among different group of gamers. Final care and touch.com ranked the number one on Top 3 games and top paid download chat on China's iOS APP store, shortly after they are released respectively. Looking at our content updates and new game pipeline, we are excited to celebrating FGL 3 year anniversary beginning at the end of August with a major company update in our company in promotion activities. We also have several titles that have acquired approvals and are scheduled to release in the comings months years. These include exclusively licensed alternative growth and the jointly operated webcam The Legend of Heroes, and highly-anticipated ACG mobile game, focused with matchmaker without [Indiscernible].

In addition, we look forward to expanding our game distribution outside the mainland of China. We plan to release a series of ATG titles in selected Asian markets including [Silver's Yama] Final Gear, [Indiscernible] and Duck Boat. Looking at our live broadcasting and VAS live, revenue increased by a 175% year-over-year to RMB326 million in the second quarter of 2019, with contributions from both our live broadcasting and VAS and improving membership.

Currently, again YouTuber audio and ACG related talent shows are the top categories gaining traffic and converting visitors to paying user. We are also actively expanding our eSports related live broadcasting content offering by introducing top eSports matches including LPL, OWL, KPL NPI. This premium sports content attracting tens of millions of viewers and converting our e-pool game lovers to live broadcasting users. Our premium membership program gives paying users access to advanced or exclusive content and continues to bring in new subscriptions.

By the end of June, we had recorded 5.3 million valid premium members, up 148% year-on-year. On advertising business, we are beginning to see positive side despite a challenging market economics environment. Revenues from advertising increasing 75% year-over-year to RMB168 million in the second quarter of 2019. We are also improving advertising efficiencies which helps increase our unit price. The top three industry verticals for live broadcasting in the second quarter for skincare and cosmetics, food and beverage and e-commerce. And the Top 3 vertical for performance base advertising were game, education and the e-commerce.

And to finalize, our e-commerce and other revenue stream also continue to grow reaching RMB124 million in the second quarter, an increase of 489% from the same period 2018, largely due to our expanding performance platform for the self. We have made several investments to scale our business over time, expand our revenue stream. Our majority is taking healthy and extends our reaching offline payment and adds a new revenue stream to our commercialization efforts.

We can now capitalize targeted purchasing of live event planning as well as talented acquisition and management. Similar to our investment in united comics and the [MA ATP]. We believe these investments have great synergies with our existing business and will further expand our commercialization capabilities. Our partnership with other market leaders such as Tencent and Alibaba are also progressing and adding our growth.

We continue to expand domestic animation copyright and collaborate on some of the A list of titles including new season of [Indiscernible]. On James Bond, we now jointly operate a number of Tencent highly rated mobile games including game Monsoon, Street Hunter and a Sport Warrior. With more games in the pipeline, we are also working closely with Tencent on the eSport front. We complete this gain and on the live broadcasting right to Tencent's premium sport league LPL and CPL.

On the Alibaba partnership front, we have expanded our partnership with new collaboration plans with T-Mall in addition to [Indiscernible]. We are testing a number of innovative functions to better adapt for e-commerce platform. We expect this integrity to continue to help to expand our pricing services and grow our paying user base.

As we move forward, we are focused on continued growth. User growth is at all time high and we want to build on this momentum. Our strategy calls for more proactive user acquisition and as well as improved realization capability. While we invest in the future, we will also focus on the quality of users by attending to retention rate and analyze our marketing efforts.

We are confident about our user growth plan and believe it will form the great foundation for our September growth and the future success. This concludes Chen's remarks. I will not provide a brief overview of our financial results for the second quarter of 2019.

Our total net revenue increased by 15% year-over-year to RMB1.5 billion. Our non-game revenue accounted for 40% of total revenue in the second quarter up around 33% in the second quarter of last year. We are pleased with the progress of our commercialization strategy and the average number of monthly premium user's more than double year-over-year in the second quarter of 2019, reaching 6.3 million.

Cost of revenues increased by 66% to RMB1.3 billion compared to RMB776 million in the same period in 2018. Revenue-sharing cost, a key component of cost of revenues, was RMB573 million, representing an increase of 37% from the same period in 2018.

Gross profit was relatively flat at RMB252 million for 2019 second quarter and RMB251 million for the comparable period.

Our gross profit margin was 16.4% compared with 24.4% for the comparable period and improved from 13.8% for the first quarter this year. This sequential date margin improvement was mainly thanks to the increase the revenue contribution from our high margin game business. Total operating expenses increased to RMB597 million, representing an increase of 67% for the same period of 2018.

Sales and marketing expenses were RMB240 million, representing an 88% increase year-over-year. This increase was primarily attributable to the increased channel and marketing expenses associated our app and brand, as well as promotional expenses for our mobile games, and increasing headcount in sales and marketing personnel as well as the fulfillment costs for our e-commerce related product.

R&D expenses were RMB216 million, representing a 64% increase year-over-year. The increase was primarily due to increased headcount in R&D personnel and other increased research and development expenses for online games app development in our virtual business.

G&A expenses were RMB141 million, representing a 44% increase year-over-year. The increase was primarily due to increased G&A personnel-related expenses and increased amortization expense related to intangible assets acquired through business acquisitions, partially offset by a decrease of share-based compensation expense.

Loss from operations was RMB345 million, compared with RMB107 million in the same period of 2018. Net loss was RMB315 million for the second quarter of 2019 compared with RMB70 million in the same period of 2018.

Adjusted net loss, which is a non-GAAP measure that excludes share-based compensation expenses and amortization expense related to intangible assets acquired through the business acquisitions, was RMB256 million, compared to RMB19 million in the same period of 2018.

Basic and diluted net loss per share was RMB0.96 adjusted basic and diluted net loss per share were RMB0.78.

As of June 30, 2019, the Company had cash and cash equivalents, term deposits, as well as short-term investments of RMB8.6 billion.

In April 2019, we completed an offering of convertible senior notes due 2026 in aggregate principal amount of US$500 million, and concurrent offerings of approximately 14.2 million ADSs and 6.5 million ADSs from certain selling shareholders, the company received in combination of the notes and share offerings total of approximately US$733.9 million in net proceeds.

Looking ahead, our financial goal is to further grow our brand name and improve our operating efficiency.

With that in mind, we are currently projecting net revenues for the third quarter of 2019 to be between RMB1.74 billion and RMB1.77 billion. Thank you for your attention. We will now like to open the call to your questions.

[Operator]

[Operator Instructions]

Your first question comes from the line of Hillman Chan from Citi. Please ask your question.

[HillmanChan]

[Foreign Language]

[JulietYang]

Excuse me, Hillman, we can't hear you. I am sorry.

[HillmanChan]

Thank you, management for taking my question. Noting that MAU growth accelerate in the quarter. Could management share more on the user growth strategy? Why are we trying to accelerate user growth right now in this quarter? And also where are we acquiring the users from which particular channel and addressing which particular user demographics? And how should we think about the related marketing expense and target for MAU by the end of this year and next year? And then my second question is on live streaming. Could management shed more its strategy as to how we control users from video viewers to live streaming? And how we step up, help the user system update behavior going forward? Thank you very much.

[RuiChen]

Okay. So I'll take the first question. I'll discuss why we wanted to accelerate our user growth at this stage and how we are going to do it. And Sam will explain little bit more on the cost side. So, first of all, why we are doing so because we have made substantial growth on our content ecosystem. We have made breakthrough on both quality and quantity of our content.

So first for example on the content side, we've seen substantial growth on the number of content release submitted daily on our platform. And our video views also improved substantially. How many users have participated in the inter action and how many searches per DAU per day. They have all grown substantially over the past few years.

So second we have extended to new content categories without doing massive subsidy on the content or signing massive new content creator. For example, the new content submission in the log session increased 81% sequentially in Q2 and on the mobile content submission side on average in Q2 over about 47% of the content was submitted through mobile content submission function. And this ratio was even over 50% as we move into summer. So we work at our blockbuster hit new titles, new videos emerging on our platform, we see a lot of new content creators and new videos emerging in lifestyle, entertainment and technology. Those are the relatively more general emerging content categories that become more and more popular on out platform.

So based on the length and depth of our content we evaluated the overall content supply on our platform now can at least supply over or can support twice as much of our existing user base.

So second of all also based on our internal data as our content getting more massive and our users increasing faster than ever, the retention level and engagement level of our community also improved. So for example, when went for IPO in late 2017, the 12-months retention rate of our official members, member who take the community exam test were about 80%. And when we are looking at the data right now in second quarter 2019, the one who joined us since second quarter 2018, their top month retention were even above 80%.

So the long-term retention rate has been essential to the longevity and activeness of our community. And from this data is suggesting that user's long-term satisfaction rate and to our community actually improved over time.

Third is we have improved our monetization capability. So for example, looking in the [Indiscernible] show, the number of users who paid in the first half were also newly registered user actually improved 60% year-on-year. And that absolute number of paying users actually already surpassed the number of users who paid in 2017 who are also joined on 2017. So this supports our theory that we have improved our ability to monetize new users. And on our ability to monetize to non-game business, our non-game revenue per MAU actually improved 102% year-on-year in the second quarter.

And the money we spent on user acquisition actually improved -- increased 70% year-on-year much lesser than the revenue. This means we are able to make much more money on single new users compared to the money we spend on acquiring them. And another data that we can provide is the paying ratio for users who joined in 2017, their 2018 paying ratio actually doubled compared to 2017. That mean once the user are in our community they are tend to spend over time. So that concludes our three points one as we are able to attack a lot of high quality users and we are virtually retain them and mostly importantly we can better monetizing those new users as our amortization progresses.

And we would like to update our MAU target we previously guided our MAU target for this year were 110 million to 120 million. Now we raised that target to reach 120 million to 130 million by end of this year. And we also like to update our three year MAU target from 150 million to 220 million by 2021.

More importantly to achieve this target we do not just simply want to increase the number of users; we also like to maintain the quality of the user. And we can achieve that by leveraging the longevity, the power to activeness of our content ecosystem. And how we are able to -- how we achieve to that type of target is the same as we said in before. Bilibili's user growth are not purely just rely on buying traffic or making subsidies to our content creators, it's rely on our substantial and rich content ecosystem, we wanted to do content optimization and upgrade on our content ecosystem and improve the engagement and activeness of our community and improve our product design and upgrade on our branding, on our marketing effort, also improve our channel user acquisitions.

And make elaborate our strategy from three assets. First is on the branding side. Over the past 10 years, we barely did any promotion in marketing on Bilibili brand. Although a lot of youngsters know Bilibili very well but from wider demographic age bracket or lower tier city, and there are still 70%-- some of the new users do not know Bilibili; do not know what Bilibili can give. So in this starting from the second half of this year, we will be past-- we are going to upgrade our branding campaign and starting to do more branding awareness and promotion to those users who do not know Bilibili.

So those are one of the highest priority job in our do list. Second is to optimizing improved on our product as well as our algorithm. In the past we have been very focused on the long-term retention of our users. And now we wanted to also focus on the retention rate of our new users and this will definitely be very helpful on the user growth. And third is to improve our ability to acquire users from various channels. In the past our investment in channel acquisitions actually is lower than industry average or at around our similar scale to their product. And in the future we are going to improve our ability to acquire users from various online and offline channel.

And above all else we wanted to improve our conversion from our top x to paying and increase revenue per MAU. And I think in the past we have proven our ability to monetize our traffic and as our user continues to grow we should be able to grow our top line as we expand our user base.

[SamFan]

Okay. I'll take the -- have a shot. As Chairman stated, we are at the right time to entering to this strategy. And that two key were all the spending will be [Indiscernible]. We will take order wise order spending, we actually-- Chairman mentioned that we are not enter to look at accumulate acquire the new users through the marketing spending but if you look at marketing dollar we spent, we will make sure that, that all the marketing dollar we spend will be collect through the growth of the top line. There are also two or three quarters delayed we should take time for our platform to monetize that user traffic.

But based on the metrics mentioned during our call as Chairman also mentioned that our conversion from our video users to pay users is quite good and their spending behavior is exceeding our expectations. So we want to take that very seriously. And secondly, if you look, want to note on guidance about the marketing dollar spending, actually in Q3 last year we spent about 18% of the total revenues for the telemarketing expenses and 16% marketing expenses in Q4. We now guide that number in this year will be around 19% to 20% in Q3 and Q4. So it will continue -- it's not significant delay in quest of the marketing dollar spending by the way of allocating work to various annual growths and the growth of the top line in next year.

[RuiChen]

So on your second question regarding our live broadcasting, over the past few quarters we can see the content consistent of our live broadcasting is also rising. And on the games front, we already have our edge in terms of game related video content. And game related live broadcasting is actually helping us to even elevating that competitive advantage, you can see whenever we have that when the market have new games that will stimulate the growth of content on our live broadcasting content platform. And also the popularity among East Port is also starting to show positive effect on our platform.

So new emerging content category is gaining popularity on our video platform. The new live broadcasting content also thriving. For example, live type of content we are seeing as the law getting more and more popular, the lifestyle related live broadcasting is also gain traction similar with the steadying live broadcasting. Those are the emerging category that we see on our live broadcasting platform.

We used to say live broadcasting is our natural extension of our live broadcasting -- of our video platform and is also a type of ability we have to acquire. And over a few, past few quarters we have proven that ability. So in the past we haven't spent big bucks to -- on top post signing or big marketing campaign. However from the performance of our live broadcasting that can -- in the past few quarters that also is strong evidence that our live broadcasting is growing with our content ecosystem.

And on the monetization front we can also see a lot of highlight and narrows or echo with our video platform ecosystem built uprising of YouTuber live broadcasting is an evidence to show our dominant position in the ACG industry. The number of YouTuber host and the number of viewers who watch YouTuber content and number of users who pay for YouTuber live broadcasting is increasing very fast. And we can also see the paying ratio for YouTuber is much higher compared to other regular entertainment categories.

And we are confident that we are able to become the leading player in the YouTuber live broadcasting industry. On Bilibili, there is a strong fan host emotional connection already established on our video platform. And we can leverage that connection on our live broadcasting platform. That [high] function is actually a tool to monetize the fan economy.

So to summarize the Bilibili live broadcasting advantages on the games front, we have equivalent or even stronger capabilities to continue to grow our game related live broadcasting content given our massive gamer's user base and game video content. And Bilibili's strongest ACG area we can also see some of the emerging new content category; we can also monetize our emotional connection from host and fan.

[Operator]

Your next question comes from the line of Thomas Chong from Jefferies. Please ask your question.

[ThomasChong]

Thanks management for taking my question and congratulations on the strong results growth this quarter. I have a question about our live streaming and VAS. Given the fact that revenue per AMU is growing very lightly how should we think about the revenue contribution from live streaming and VAS going forward over the next couple of years? And should we consider it is more driven by revenue per AMU or paying ratio? Thank you.

[SamFan]

Okay. Thomas, let me take your question. Currently, the live broadcasting and VAS contribute about 20% of the total revenue. We foresee that number will going up in the short term period. But we also guided that our non-game revenue represent total revenue will ultimately contribute around 50% of the total revenue. That includes advertising, live broadcasting and VAS and other revenue. So we quite look at over to that and the growth driver for live broadcasting again is now mainly for the paying ratio as well as the total targeted growth of the MAU converted through our total MAU to those live broadcasting event as well as our VAS venue. I hope that answer your question.

End of Q&A

[Operator]

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

[Juliet Yang, Senior Director of Investor Relations]

Thank you once again for joining us today. Juliet Yang, Bilibili's Senior IR Director or TPG Investor Relations. Our contact information for IR in both China and the U.S. can be found in today's press release. Have a great day.