Bilibili Inc.

Good day and welcome to the Bilibili 2020 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.

Thank you, Operator. Please note the discussion today will contain forward-looking statements relating to the company's future performance. and are intended to qualify for the safe harbor from liability as established by the U.S. Private Security 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 this discussion. A general discussion of the risk factors that could affect Bilibili's business and financial results is included in certain filing of the company with the Security and Exchange Commission. The company does not undertake any obligation to update 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 2020 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 BilliBilly's investor relations website at ir.billibility.com. Joining us today on the call from Bilibili Center Management are Mr. Rui Chen, Chairman of the Board and Chief Executive Officer, Ms. Kali 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 the prepared remarks on behalf of Mr. Chen.

Thank you, Juliet. And thank you everyone for participating in our 2020 so-called conference call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. We see a golden opportunity to expand our reach in today's market. To seize this window, we step up our approach to user growth, with a focus on further growing our content, expanding our brand awareness, and targeted channel acquisition. This will be especially fruitful in our third quarter peak season. As a result, our user base hit a record high. In August, our MAUs exceeded a 200 million milestone, marking a new monthly record. Total MAU for the third quarter was up 54% to 197 million, and the DAU was up 42% to 53 million, both on a year-over-year basis. Mobile users also continued to grow at a faster pace. Mobile MAUs were up 61%. Our users are highly engaged, spending an average of 81 minutes per day on our platform, making Bilibili one of the steepest video communities in China. The quality growth of our users is not only reflected in the high engagement levels, but also in the paying user conversions. were up 89% year-over-year, reaching $15 million in the third quarter. And our pay-in ratio improved to 7.6% from 6.2% in the same period last year. These increases drive our top-line expansion in the third quarter. Runway reached another record high of RMB $3.2 billion, up 74% year-over-year. While we grow our top line, we also improved our gross margin. Gross margin was 23.6% in the third quarter, up from 18.9% in Q3 last year, and we are gaining even more operating leverage. While Bilibili has become a household name among young generations, there are large groups of potential users who are just beginning to learn about us. The Gen Z community acts as our anchor as we begin to cast an even wider net. Today, we are gaining traction with more diverse demographics than ever before. Marketing campaigns such as our newly introduced slogan, Bilibili, all the videos you like, have helped us to define and promote our appeal to mass audience. During the third quarter, we launched a series of online and offline campaigns to promote our brand proposition to an even broader audience across different demographics. This strategy is working. and we are carrying these efforts into the fourth quarter. Our industry partnerships are also strengthening our content offering and brand. In August, we entered into a five-year business cooperation agreement with Huanshi Media through a strategic equity investment in which we gain exclusive broadcasting rights to Huanshi's existing and upcoming high-quality movies and TV drama theaters. We have also entered into a three-year exclusive partnership with Ride Games for the exclusive live broadcasting ride of League of Legends World Championship. This has significantly enhanced our position and brand in the important esports genre, especially during the S10 this year. And in October, we deepened our partnership with Sony by signing a strategic agreement with a subsidiary, Amiplex, to bring more premium anime content and mobile games to our users. These expanding alliances not only enrich our content offering, but also demonstrate that those domestic and international industrial leaders have common recognition for our unique value in China's entertainment market. While we are working to build our brand and attract more users, increasing demand for high-quality video content bodes well for capitalized on-the-growth prospectors. represent the largest online video population in the world. According to the Cinex report, by the end of the first half of 2020, near 819 million users in China consumed online content in video format. Faster networks and smarter hardware enable more accessible content creation and consumption. Our experience over the past decade has made us a pioneer of visualization movements. We are committed to capturing this market opportunity by further executing our growth strategy, which will pretty well yield considerable returns in the long run. With that overview, I would now like to provide some more color on our content, community, and commercialization activities. I will begin with a review of our content. Our POGV content ecosystem is the cornerstone of our business and the main engine that powers our growth vehicle. For the first quarter, we had approximately 1.7 million content creators uploading 5.6 million videos per month, representing increases of 51% and 79% respectively, both year-over-year. We continue to cultivate a nourishing soil to allow content creators to grow and flourish. By promoting originality and ingenuity, our algorithm enables the highest quality of original content to quickly gain traction and expand its fan base. In the third quarter, The number of videos that achieved 1 million video views increased 73% and the number of content creators with over 10,000 followers grew 75% both year-over-year. Meanwhile, we continue to help our content creators and better monitor rewards through our Caching Center program and our newly launched advertising platform, Sparkle. The matchmaking platform is designed to better connect advertisers and content creators and bring more commercial opportunities to our creators by providing a safe and scalable portfolio for native ads. Each of these components help us maintain and grow this important POG ecosystem. Our top five verticals in terms of video views in the third quarter were lifestyle, game, entertainment, anime and tech and knowledge. Among these, tech and knowledge is emerging as one of the fastest growing sectors. Learning on Bilibili is also trending as many curious minds are attracted to our platform looking for informative and educational content. In the past 12 months, there were nearly 100 million users across different age groups watching knowledge-related videos on Bilibili, making us one of the top learning platforms in China. While we enhance our content offering in our leading verticals, We are actively expanding our content reach in new categories. The automotive sector was one of them. In Q3, video views in this genre grew roughly at 177% year-over-year. This reflects our longevity and staying power with users at Day Metro. In this case, our ConeJD users have come to a life stage for auto consumption. This transition also helped us attract wide demographics and open new advertising opportunities across broader industry groups. Turning to our OGB, our investment in IP content is paying off. With our stronghold in this genre, Bilibili Produce Chinese Enemy not only attracts massive new users, but also becomes the most effective driver of premium memberships. This is especially true for self-produced Chinese Enemy, CapGridBone, Yuan Long, generating 260 million views in just three months since its launch. In September, we were excited to welcome the Syrian TV drama Run for Young to our platform, marking the first TV drama to form our collaboration with Huanxi Media. This show was an immediate hit after it released and trended number one on Bilibili Most's search list for weeks. This show has generated 410 million video views, setting a new record in this category. We are also reaching new heights for our documentary and variety show department. Our very first self-produced musical variety show for youth, 说唱新世代, received outstanding reviews beyond our typical community, generating approximately 410 million video views and 8.2 million bully charts. This success may not only enrich our music category, but also attracted and inspired a great number of musicians and music lovers. Looking at documentaries, we believe our recent agreement with BBC Studio is a strong endorsement of our documentary quality and will further enhance our content library. Also, building on the success of last year's gala, we will be arriving at another Smashing New Year Eve gala event We expect this year will bring our community more excitement and joy. Turning to our community, while our user growth continues to rise, we set a number of new records across our key community matrix. In the third quarter, our daily video views reached 1.3 billion, up 77% year-over-year. Our users generated 5.5 billion monthly infections through bully chats, comments, likes, and Bilibili moment posts. of 117% year-over-year. The number of our official members is also on the rise. At the end of third quarter, we had 97 million official members who passed our 100 questions exam of 56% year-over-year. The attention levels also remained strong, well above 80%. With a decade of experience in our belt, We believe our community remains one of our biggest competitive advantages and most in the involving online entertainment industry. Turning to our commercialization progress. The growing traffic on our platform fills each of our business lines as well. We roll out more premium content and services to meet our users' diverse entertainment needs. Our game business. Revenue for our mobile game business will only be 1.3 billion, up 37% year-over-year, accounting for 40% of our total revenues. Building our massive game lover base, we continue to expand our game offering in diverse genres as we maintain the popularity of our existing titles. Our new blockbuster game, Princess Connect , continues to resonate with our fans and attract new users. It was another strong testament to our robust distribution and operating capabilities in the ACG genre. In October, we renewed our exclusive FGO license with Aniplex and celebrated the game's fourth anniversary. Additionally, we launched a few new titles during the third quarter, which include Animagetix, Wanling Qiyuan, Zhanyaoqin, and Ash Arm, Huijin Zhanxian, all of which have been well received by our users. And for our game pipeline, We have 10 titles in diverse genres that have acquired approvals and are ready to be released in the coming quarters. Next in queue is World Art Online, Dao Jian Shen Yu, planned for launch at the beginning of 2021. Looking at our jointly operating games, we continue to work with the leading game developers to bring our user-friendly titles. Our solid reputation Strong game operation capabilities and high destiny gamers demographic have made Bilibili the go-to platform for joint operating partners. In September, as its main Android partner in China, we began jointly operating the highly anticipated Genshin Impact, Yuan Shen. The massive success of Yuan Shen and our operation is another feeder in our path. Other near-term joint titles include a plan to distribute native Harry Potter. Turning to our vast business, revenue from vast increased by 116% year-over-year, reaching RMB 980 million in the third quarter. Our growth was mainly driven by increased contributions from premium memberships, live broadcasting, and other value-added services. As our brand name continues to spread, we are attracting business partners and live broadcasting hosts and adding new and diverse content to our growing library. Esports is a prime example. Our League of Legends World Championship live broadcasting ride has secured important place for Bilibili in serving esports genre. As we showcase our capabilities, more esports hosts and lovers are turning to Bilibili's immersive live broadcasting experience. For the entire S10 Championship season, total live broadcasting page views related to the game increased by over 300% compared with S9 last year. We are pleased to see our users growing willingness to pay for advanced or exclusive access to our OGV content. By the end of the third quarter, we had 12.8 million premium members, up 110% year-over-year. As we roll out more excellent, exciting content, we are confident we can continue converting more premium subscribers. Finally, our advertising business. Despite challenging microeconomics, and the environment, we delivered another accelerated growth in our advertising business. Run use from the segment reached RMB 558 million, up 126% year-over-year. Our efforts to spread our brand name not only attracted wider user groups, but also impressed many new business partners. Our targets across different industries are turning to Bilibili to tap into the converted young demographic. Our top five leading verticals in the third quarter were e-commerce, food and privilege, games, greasy products, and automotive. In summary, we are on an excellent growth trajectory. With solid execution of our user growth initiative, we continue to improve our brand equity and reach new heights across key user matrix. The industry trend toward visualization is working strongly in our favor as we provide the most unique and the community experience of both content creators and users. Capitalizing on this momentum, we aim to further grow our brand, enrich our content offering and unleash the great potential of our expanding online entertainment ecosystem. This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the third quarter of 2020. Our total net revenues increased by 74% year-over-year to RMB 3.2 billion, exceeding the high end of our guidance. With our non-GAMs accounting for 60% of the revenues, we are pleased with the commercialization progress of our non-GAM offerings and our ability to convert our online traffic into paying users. The average number of monthly paying users increased by 89% year-over-year, reaching 50 million in the third quarter. Cost of revenue increased by 63% year-over-year to RMB 2.5 billion. Revenue sharing cost, a key component of cost of revenues, was RMB 1.2 billion, a 77% increase from the same period in 2019. Gross profit increased by 170% year-over-year to RMB 762 million. We are seeing more operating leverage from our diversified running streams. With more revenue contribution from our higher margin bearers as well as additional income from paying users, our gross profit margin continues to improve, reaching 23.6% in the third quarter. Total operating expenses increased to RMB 1.8 billion, up 138% from the same period of 2019. Selling and marketing expenses will only be $1.2 billion, representing a 227% increase over the year. The increase will mainly attribute to the increased channel and marketing expenses associated with our app and brand, as well as increased expenses for our mobile games and sales and marketing personnel. Building our brand appeal among the broader audience is one of our key initiatives in 2020. This strategy is affording us far-reaching market gains that we think will have long-term efforts. We plan to continue to build on this momentum to further strengthen and expand our virtual growth cycle. GNI expenses will only be $253 million, representing a 55% increase over the years. The increase was primarily due to increased headcount in general and administrative personnel, and increased share-based compensation expenses. IMB expenses were RMB 401 million representing a 62% increase year-over-year. The increase was primarily due to increased headcount in research and development personnel. Net loss was RMB 1.1 billion for the third quarter of 2020 compared to RMB 406 billion in the same period of 2019. Adjusted net loss, which is a non-GAAP measure that excludes the share-based composition and amortization expenses related to intangible assets acquired through business acquisitions, was RMB 990 Comparing to RMB 343 million in the same period of 2019 Basic diluted net loss per share was RMB 3.08 Adjusted basic diluted net loss per share was RMB 2.76 As of September 13, 2020, we had cash or cash flow equivalent time deposits as well as short-term investments of RMB 14.1 billion or USD 2.1 billion compared to RMB 8.1 billion as of December 31, 2019. Our monetization capabilities continue to improve as we leverage our growing traffic base of users across an increasing border spectrum of demographics. We will also continue to roll out more premium content services to convert more paying users. We believe that over the longer term, these monetization efforts High-paying user conversion rates and scale will yield an improved bottom line. With that in mind, we are currently projecting net revenue for the fourth quarter of 2020 to be between RMB 3.6 billion and RMB 3.7 billion. Thank you for your attention. We would like now to open the call to our questions. Operator, please go ahead. Thank you, sir.