Bilibili Inc

NASDAQ:BILI

Earnings Call Transcript 2018-Q3

[Operator]

Good day and welcome to the Bilibili 2018 Third 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 the Company’s future performances and are intended to qualify for the Safe Harbor from liability as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performance 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 statement 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 2018 third 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 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 I will now 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 third quarter call. I am pleased to deliver today’s opening remarks on behalf of Mr. Chen. The third quarter was again another period of healthy growth for our business. We continue to execute on our strategy centered around content community and commercialization leveraging our high-quality content.

We are attracting a number of users to our platform. The user interaction become member help to create and solidify our community supporting a high level of user engagement and commercialization comes naturally through our understanding of each user’s entertainment needs.

In the third quarter, our total net revenues were RMB1.08 billion exceeding the high end of our previous guidance and representing 48% year-over-year growth. Meanwhile, our monthly average paying users continue to grow reaching 3.5 million demonstrating over 200% growth year-over-year.

Over the quarter and in recent months, we have enhanced and expanded our content through a number of collaborations as announced in early October. Foreign Tencents increased equity investments totaling approximately US$380 million. We deepened our partnership by entering a strategic collaboration.

The agreement will enable us to leverage Tencents primary content, particularly in licensing, co-producing and investment in Anime as well as publish Tencents large portfolio of high quality mobile games.

Going forward, we are open to forging relationships with more industry leaders to improve our content offerings and monetization capabilities. Cultivating in content continue to invigorate our global standards growing community in the third quarter. Our average monthly active users grew by 25% year-over-year reaching 93 million. The number of mobile monthly active users grow even faster by 33% year-over-year reaching 18 million.

Our core user group or official members who took a 100 question exam will again outgrow our MAU by 45% year-over-year to 42 million. We continue to see deeper penetration in lower tier cities. We have very balanced agenda mix and both general and ACG content are driving user growth. While our users are growing at a healthy pace, the amount of time spent and the level of user engagement continue to rise.

Excluding time spent on mobile games, our users spend on average of 85 minutes daily on our platform in the third quarter, up from 75 minutes in the previous quarter. Users can enjoy hours of entertaining content covering a wide area of category of Bilibili. During the third quarter, the top five most content verticals were entertainment, lifestyle, games, anime and the technology.

Professional user generated video, or PUGVs remain the prime for our video content creation. During the third quarter, 89% of our viewed videos came from PUGVs. Our incentive program we initiated at the beginning of the year to support our growing pool of content creators are progressing well. New product functions such as mobile content submission enable content creators to create content anywhere and anytime.

During the third quarter, we had on average 0.6 million active content creators uploading 1.7 million videos monthly represent 130% and 136% year-over-year growth respectively. Besides PUGVs, our high quality license content further reinforce our leading content categories such as Anime and Documentary.

Our primary license content not only provides users hours of high quality entertainment but also helps drive the remarkable growth for our primary membership program while partnering with leading content creators like BBC and Discovery to co-producing titles like AcFun, and self-produced documentary [Inaudible]

Bilibili is now one of the largest producer and broadcaster of documentary in China. Additional content such as our first half produced show variety show Star Men 2 is also resonating well with many users. Being a community for young generation enable us to learn and identify what’s trending for young minds including rich IT carries high potential and which entertainment forms will be the new frontier.

With our investment in these we added considerable new content in virtual idol including China’s most popular virtual idol Luo Tianyi and we started to explore Virtual Youtuber or Vtuber. We believe this initiative will further enhance our extensive portfolio of industry leading license and the PUGV material.

E-sports is another area that gain more of a spotlight with young generation. With our foresight into the industry trend, we began investing in sports years ago. In addition to the previously announced Bilibili Gaming E-sports Club and its participation in Tencents League of Legend Pro League or LPL we have had a permanent spot that brings us prestigious Bilibili team will represent the - during the 2019 Overwatch Championship.

In addition, we are delighted to announce the launch of our second mobile application, Bilibili Comics earlier this month. We believe this initiative will further complement our core user growing appetite for premium license ACG content and solidify our leading position in China.

Technology remains the core of our business. We continue to increase our investment in research and development to drive product efficiency and improve our users’ experience. Our AI and big data power technology systems as well as product design help connect our users content over 35% of video views are now generated by our smart recommendation system and over 40% of MAU visited our Bilibili moment.

Our social function similar to Instagram allowing users to interact and engage with live mail reference in the community.

Turning to the second pillar of our business, our dynamic community is more active and engaged than ever. During the third quarter, we saw remarkable participation levels with over 440 million daily views and more than 1.1 billion monthly interactions through bullet chats, comments, likes, Bilibili moments which demonstrate increase of 120% and over 300% year-over-year respectively.

The high level of interaction is one of Bilibili’s most distinguished features setting us apart from other video platforms and generating new content and forging strong balance among community members.

With that overview, I would like to take a few moments to review our operations within each of our core business. Revenue from our mobile games grew 24% year-over-year to RMB744 million led primarily by the contribution of Fate/Grand Order or FGO.

FGO’s performance continues to be stable and we were delighted to celebrate the game’s second anniversary in September followed by a series content updates that were introduced in October. We are also looking forward to building a brand new chapter two for FGO with major content update in Q1 next year.

Additionally, we released a few new titles exclusively including Order assuring ACG Team RPG in September and sometime in November. Our exciting ACG Team RPG with a well-known IT which is starting to gain early momentum. On the jointly opened operated game front, we published several high quality titles in the third quarter, they are produced by leading games developers including Asian [Inaudible] All have been well received by our users.

In the fourth quarter, we are happy to bring a number of highly anticipated games to market including Diluter Online from Tencent and Knives Post Survival from NetEase. In terms of new games, we have a number of additions on [Inaudible]

As we have previously discussed, some of the highly rated ACGs that we are looking to bring to our users including RPG Princess Connect, Redive and Mackinas Record as well as venturing A3 all from well known Japanese game developers such as Aniplex.

We also have exclusive publishing rights to the - and plan to jointly publish the Legend of Heroes. Based on these games and special IP our previously performance in Japan we were off the mistakes that our community well received them enthusiastically.

In addition, we are actively exploring international opportunities. And now our recent collaboration with Gree and our newly formed JV, we will not only be jointly developing mobile games, but also begin to test our international aspirations by bringing our content to Japan market.

Turning to our advertising business, supported by our attractive platform of the immersive content, user interactions and our user base from tier-1 and tier-2 cities. Advertising revenues increased by 179% year-over-year, to RMB137 million or US$20 million. We are happy to see continued growth in brand advertising as well as our performance-based advertising business.

Performance-based advertising has grown rapidly to more than 40% of our advertising revenue in the third quarter. And we wrap up the number of clients and as well as improved accrual with them, we believe there is a great growth potential for this business.

Our live broadcasting and the VAS revenues increased by 292% year-over-year to RMB159 million or US$25 million. Beginning earlier this year, we started a number of initiatives to expand our live broadcasting content and improve productive live and user experience. We also launched a premium membership program allowing paid member to enjoy exclusively our advanced licensed content.

This initiative was immediately well received by our own community and helped drive continued growth for our paying users. In the third quarter, live broadcasting paying users grow 175% compared to the same period last year valid prime members continue to grow to 2.5 million by the end of September. This dynamic involving [Inaudible] opportunities.

We are sure to be at the forefront of the online entertainment movement that is being driven by lead generation that continues to populate our growing community.

This concludes Mr. Chen’s comments I will now provide a brief overview for our third quarter financial results.

During the third quarter, we continued to see growth in all three of our primary business lines. Our total net revenue increased by 48% to RMB1.1 billion or US$157 million year-over-year. As we wrap up our monetization efforts, we are delighted to see more diversified revenue contribution from advertising and live broadcasting and value-added services, which account for about 28% of our total revenues in the third quarter of 2018 compared with 30% from the same period in 2017.

Cost of revenues increased by 60% to RMB884 million or US$129 million from the same period of 2017. Revenue sharing cost, our primary component of cost of revenues was RMB445 million or US$65 million, representing a 68% increase year-over-year.

Gross profit increased by 11% to RMB195 million or US$28 million from the same period of 2017. Our gross profit margin declined to 18% primarily due to increased bandwidth cost, content cost related to our user growth trend and the lower revenue contribution from our higher margin game business.

Total operating expenses increased by 120% to RMB454 million or US$66 million from the same period of 2017. It is important to note that third quarter is our peak user acquisition time. The seasonality includes increased spending on sales and marketing and offline and expenditures as we continue to grow our business and further optimize our monetization structure, we expect to see better operational leverage.

With that in mind, selling and marketing was RMB197 million or US$29 million, representing a 163% increase year-over-year. The increase was primarily attributed to the increase of channel and marketing expense associated with our platform and APP as well as our offline events, promotional expense for our mobile games during the summer holidays and a increased headcount in selling and marketing personnel.

General and administrative expenses were RMB111 million or US$16 million representing a 93% increase year-over-year. This increase was primarily due to increased headcount in general and administrative personnel and increased share-based compensation.

Research and development expenses were RMB146 million or USD21 million representing a 96% increase year-over-year. The increase was primarily due to increased headcount in R&D and increased share-based compensation.

Loss from operations were RMB249 million or US$38 million, compared with a loss of RMB33 million in the same period of 2017. Income tax expenses were RMB11.4 million or US$1.7 million compared to RMB2.3 million in the same period of 2017.

Net loss totaled RMB246 million or $1.36 million for the third quarter of 2018 compared with RMB50 million in the same period of 2017. Adjusted net loss, which mainly excludes share-based compensation expenses and amortization expense related to intangible assets acquired through business acquisitions were RMB203 million or US$30 million from RMB2.9 million in the previous year period.

Basic and diluted loss per share were RMB0.88. Non-GAAP basic and diluted loss per share was RMB0.72. As of September 30, 2018, we had cash and cash equivalents as well as time deposits of RMB2.9 billion or US$418 million compared with RMB765 million as of December 31, 2017.

As we look ahead, our financial goals are to further grow our business and improve our operational efficiencies. With that in mind, we are currently projecting net revenues for the fourth quarter to be between RMB1.04 billion and RMB1.08 billion.

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

[Operator]

Thank you, sir. [Operator Instructions] And our first question comes from the line of Alex Yao from JPMorgan. Alex, your line is now open.

[Alex Yao, JPMorgan]

Thank you. Thank you management for taking my question. So I have two questions. One is about partnership with the Tencent. Now that Tencent increased the shareholding in Bilibili in the quarter. What’s the areas you guys will further collaborate? Can you guys elaborate on the partnership over the next couple of quarters?

And then, secondly, on advertising, can you guys give us a update in terms of the advertising progress? Any metrics such as, as low the CPM will be helpful. And then also, on the back of a slowing macro consumption and potentially ad budget cuts, how do you think about advertising growth outlook in the coming quarters? Thank you.

[Rui Chen, Chairman and Chief Executive Officer]

Alex. Thanks a lot for your question. I will take your question. So in October, we are happy to announce we have further established a strategic collaboration with Tencent specifically on the animation industry as well as jointly game operations. On the animation collaboration front, we are going to exchange and purchase of existing animation copyrights jointly procure, produce and investing in animation projects, as well as seek investment opportunities in the comic and animation industry.

So, Tencent and Bilibili are two of the major players in the animation industry. So by working with Tencent, this will intensively expand our content offering and effectively decrease our content investment in the animation copyright procurement.

On the games front, we have achieved agreement on a jointly operating more Tencent game and we think that’s very positive for our pipeline that will be able to offer more diverse, more content to our game lovers on our platform. So both of the animation and game collaboration are in some extent as it will extend our content offerings on our platform further diversify our monetization capability.

So, as for your second question on the advertising business progress, we think we have delivered a solid quarter of advertising business in Q3, specifically on the performance-based advertising now is contributing more than 40% of our total revenue that demonstrate our progress and potential of this business line.

So, as for the brand advertising, we also delivered a solid growth. We continue to expand the different forms of advertising based on our content ecosystem specifically on some of the original advertising content as well as some of the brand advertising on our self-produced variety shows.

The number of advertisers in the third quarter were over 660 which grew over 1500% year-on-year. And we think we still have a lot of room to grow on the advertising business front. That comes from one, the increase of number of advertisers to improved hours and to improve the advertising efficiencies.

So, as far as the upload for our performance-based ads, right, in Q3 it was only 5%. So, we think on that front there is still a lot of room to increase.

So, the upload ratio, number of advertisers, as well as the algorithm efficiencies are the three main factors that will affect our performance-based advertising revenue. We think all three factors has a lot of room to grow leading large potential in our performance-based advertising business.

[Sam Fan, Chief Financial Officer]

Okay, I will add more color on our advertising business. Our top-five industry for our advertising business in Q3 for brand advertising , food beverage, games, communication, digital and beauty products and for the preset there again allocation ,e-commerce, information and software.

[Carly Lee, Vice Chairwoman and Chief Operating Officer]

Next question please?

[Operator]

Thank you so much. And our next question comes from the line of Edward Leung from the Bank of America Merrill Lynch. Eddie, your line is now open.

[Edward Leung, Bank of America Merrill Lynch]

Hey, good morning. Two questions. The first one is on paying memberships. Could you talk a little bit about your strategy to grow the membership program, not just in the near-term but perhaps into 2019?

And then a second question is about your deferred revenues. It’s quite interesting to your deferred revenue actually coming down in the third quarter. On the other hand, the revenue guidance actually quite stable from the second quarter. So just wondering why there is a discrepancy.

[Rui Chen, Chairman and Chief Executive Officer]

So, in the third quarter, we achieved a remarkable growth of our number of paying users and large – that was largely driven by the increase of our premium membership. So, from earlier this year and Q1 we started to monetize through our premium membership our subscription model of our business, we see the progress for the last three quarters as very strong and very healthy.

So, for example majority of our premium memberships are from our yearly subscribers or monthly automatically renewed members. So, the progress is in line with our estimation that is because, first of all, we have very deep user insights regarding their interest and behavior and our users’ stickiness to – their stickiness and loyalty to Bilibili platform is much higher than they are to other platforms.

So, as long as we provide the content delight, they will continue to spend on our platform and this trend is likely to last a very long time. And so, from the first three quarters of this year, we noticed that the majority of the users who pay for our membership is paying for our copyright animation and documentary content.

For this animation and documentary content aspect we will continue to invest and increase our content offerings. So we are confident this increase will continue. So, the monetization strategy and the content offering will be tightly linked to the nature of our users and linked to the areas that we have most advantage such as animation and documentary.

We won’t be splurging too crazily to other content categories. So, we are confident to say that our – the number of premium membership will grow like the past three quarters very healthily and sustainably.

[Sam Fan, Chief Financial Officer]

I will take the second question about the balance of the revenue. As you know that, the major component for our deferred revenue balance therefore our online games, we amortized our mobile game revenue, the growth in revenue over the user’s lifecycle. About FGO, we amortized FGO’s growth in revenue in six to seven months period.

So, in Q3, we recognized or in Q4, we recognized monthly for our accounting-wise the growth in revenue for Q2 and Q3 for FGO. So you will see in our guidance we indicated that there will be some quarter-over-quarter decrease for our game revenues to have a single-digit decrease and on account, that will be offset by the increase for our advertising and the live broadcasting and value-added services.

And based on our current projection for our growth in revenue of our game business in Q4, we estimate that the balance of our deferred revenue will resume increased trend in the end of this year.

[Edward Leung, Bank of America Merrill Lynch]

Thank you.

[Operator]

Thank you so much. And our next question comes from the line of Alex Poon from Morgan Stanley. [Operator Instructions] Alex, your line is now open.

[Alex Poon, Morgan Stanley]

To ask my questions in English. I have one question. My question is regarding the MAU target. Could you give us a reassessment of your current MAU target for 2019 and 2020? Given you content offering is much more diversified, you have partnerships with Tencent and other parties inside and outside of China.

And user behavior data is very strong and step-up in sales and marketing efforts et cetera. Could you give us a reassessment? Is there any upside to – further upside to 140 million that previous MAU target for 2020? Thank you very much.

[Rui Chen, Chairman and Chief Executive Officer]

So, for the user growth trend for the next two years it will be still consistent with what we have communicated. So, by the year of 2020, we are looking on average MAU of 140 million to 150 million. And by 2019 an average yearly MAU will be 110 to 120 million.

[Alex Poon, Morgan Stanley]

I have a follow-up question on the 140 million to 150 million MAU in 2020. Could you give us some breakdown regarding the demographics, composition of this MAU if we can break down into students and non-students and also by tier cities, it would be greatly helpful. Thank you very much.

[Rui Chen, Chairman and Chief Executive Officer]

So, students estimate is as the platform grow bigger and bigger, the demographic of that platform will be closer to the demographic of the country. So, take our this year’s user profile for example, we are seeing an average age of 21 years old for our platform and our new users’ average is 19.8 years old. So, that is already a period one year older than the previous profile and that’s closer to our – to China’s internet demographic profile.

So, our new users that were registered this year we see further penetration to the third and fourth tier cities and that percentage has increased by 2% year-on-year. For the content preferences, we also see a increase in the consumption of more general entertainment content and that also in line with what’s the general public or the general young generation’s interest and behavior.

So, as for the whole platform, because we are a very decentralized community, people with different interests can find their old specific content. So, even though we see more older demographic coming in and more general content consumption behavior, as well as lower tier penetration city, but as for the old users the absolute perception of the content quality and content diversification for them is only getting better and better.

So, we are quite confident to keep the stickiness of the community. Yes, so that’s why you see under in Q3, even though our user grow drastically, the number of time spent and engagement level of our community and the retention level of our community continued to stay stable and even grow even stronger.

So we are not just growing our user base, but also increased the stickiness and the experience of quality growth. So, we are confident going forward even though that we are going to expand our user base to 110 million to 120 million next year 140 million to 150 million in 2020. We are still quite confident to say that we will be able to maintain intact community a very sticky and engaged community behavior.

So, more importantly, I would like to highlight that, in Q3, our out of the 93 million MAU, 80 million were from our mobile devices. That’s also evidence of our high quality user component. So, as everybody know, mobile devices is becoming integral part of young generation’s life and the high percentage of our mobile devices is evidence that the quality of our users’ matrix.

[Operator]

Thank you so much. And our next question comes from the line of Marcus Yang from Macquarie. Marcus, you may now ask your question.

[Marcus Yang, Macquarie]

Thanks very much for taking my questions. Just two questions here. First of all, can you give us a quick update on your view in terms of the regulatory issues in China? And we understand that though you are known through your premium platform had seen ban for a while sometimes and so I’d like to know, if you have any incremental thoughts since the second quarter earnings call on the regulation issues?

And also, we heard some game companies have been adopting restrictions on minors, so I’d like to know your – any potential impacts on Bilibili and also your thoughts on this? And lastly, I think on the FGOs, you mentioned that there has been update in the first quarter next year. So I’d just like to know on the progress of the approval of license on this update. Thank you so much.

[Rui Chen, Chairman and Chief Executive Officer]

So, to your first question, I think it’s a question about content security. So, this year, we have done a lot of work in terms of reinforce our content security infrastructure that includes to do a full comprehensive review of our existing content library on our platform, as well as increase the headcount in the content auditor team.

I think over half of our increased headcount were allocated in the content auditor team and we have set up two additional locations for content auditor center other than Shanghai. So, we are investing our manpower to enhance our content security infrastructure.

So, we will – we are quite confident about our current structure of emplacing a very safety content environment and we are very determined to protect the integrity of our platform that includes to continuously review the existing content and execute even tighter new content approval process.

So, as for your minor question, actually we have always been emplacing what the government requires for all games which is a real name registration system, as well as a parent monitoring system to avoid overtime spent for minors.

So, we have further reinforced our parent monitoring system to help the parents and the society to control and avoid minor’s hours, spending too much time on a mobile game. So, in the past we have been fully compliant with all the government requirements. So, we don’t see a lot of risk at that front. So, on the user profile front, our average age of our platform is 21 years old.

The minors would find us 14 and above is far less than 10% and the paying user is even less than that. So, even if they were to be more stringent on minor control, that wouldn’t have a much of a impact on our revenue scale.

So, as for the game approval status, we don’t have new updates, but we have been actively preparing and exploring different alternatives for game development. So, as for the games in our pipeline, four of them has complete all the pre-requisites process for approval and seven of them are nearly in completion.

So, as soon as the approval process reopens we should be able to have a number of games that’s ready to launch. So, as for the approval suspension, we are – because it’s a industry-wide phenomenon, we are just dealing with it – with a humbly heart and exploring other alternatives. So, we think it’s just a matter of time for the game approval to be reopened. It won’t be a permanent issue.

Okay, so, Mr. Chen feels like, it’s only a short term impact, not a long-term impact. It’s a business that’s still impacted. There is still a lot of demand for mobile game content. So, it’s just a matter of time. Okay, we will wait for the good news.

[Marcus Yang, Macquarie]

Very helpful.

[Operator]

Thank you so much. And our last question comes from the line of Tian Hou from T.H. Capital. Tian, your line is now open.

[Tian Hou, T.H. Capital]

Yes, management. The question is related to the margin front. So, if I look at the margin, it’s slightly down. So I wonder what’s the reason. Is that because the live broadcasting was increased and taking more portion? So, the first point what’s the reason. And then second one is, what’s the trend going forward? So that’s the number one question.

Number two is about the two games. So I wonder, so two games, two major games. What’s the percentage of total revenue those two games are taking? And going forward, what’s the portion of the total revenue is likely to come from these two games? That’s the two questions. Thank you sir.

[Sam Fan, Chief Financial Officer]

Okay I will take this question. For the gross profit margin, our current gross profit margin is 18% mainly because we have some incremental cost for bandwidth cost and content cost, as well as the contribution from our campaign of game revenues they are decreasing mainly because the revenue per game in Q2 and Q3 are bit lower than Q1.

And we also talk about, we saw very nice trend for the game content revenue. In Q4 – in Q1 next year, we will see the resume of increase – of a quarter increase of our game revenues. So, I feel the margin will be improved in Q1 next year. And the two new games, currently, we just launched a game this month and last month and we saw an early momentum. Okay, yes, for Fate/Grand and Azur Lane, they are quite stable and still performance in Q4 and we – the chapter will also in Q1 next year that will [Inaudible]

[Tian Hou, T.H. Capital]

Thank you. That’s very helpful.

[Operator]

Thank you so much. And that concludes the question and answer session. I would like to turn the conference back over to the management for any additional and closing comments. Please go ahead.

[Juliet Yang, Senior Director, Investor Relations]

Thank you, once again for joining us today. If you have any further questions, please contact myself, Juliet Yang, Bilibili’s 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. Thank you. Bye-bye.