Bilibili Inc.

Good day and welcome to the Bilibili 2021 fourth quarter and four-year financial results and business updates call. Today's conference is being recorded at this time. I would like to turn the conference over to Juliet Yang, Executive Director of Investor Relations. Please go ahead.

Thank you, Operator. During this call, we'll discuss our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially from those mentioned in today's news release and in this discussion due to a number of risks and uncertainties, including those mentioned in our most recent filing with SEC and Hong Kong Stock Exchange. The non-debt financial measures we provide are for comparison purpose only. Definition of these measures and our reconciliation table are available in today's news release we issued earlier today. As a reminder, this conference is being recorded. In addition, an investor presentation and a webcast replay of this conference call will be available on the Bilibili IR website at ir.bilibili.com. Joining us today from Bilibili Senior Management are Mr. Ray Chen, Chairman of the Board and Chief Executive Officer, Ms. Kali 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.

Thank you, Juliette, and thank you, everyone, for participating in our 2021 First Quarter Results Conference Call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. growth remained the key word for Bilibili throughout the year of 2021. In the fourth quarter, our MAUs rose to 272 million and mobile MAUs rose to 252 million, each representing a 35% increase year-over-year, making us one of the fastest-growing companies in China's internet space. At the same time, average daily time spent on our platform rose to 82 minutes with DAUs reaching 72 million in Q4, 34% more than the same period in 2020. In fact, we have more than doubled our MAUs in the past three years, far out-pricing the industry growth rate. This is no small feat. Importantly, our expanding user scale translated to top-line expansion with consistent quarterly growth in 2021. For the fourth quarter, our total revenues reached another record high of RMB 5.8 billion, up 51% year-over-year, and our full-year revenues grew by 62% to RMB 19.4 billion. MPUs in Q4 grow to $24.5 million, up 37% year-over-year. And our paying ratio expanded to 9%. Above all, as we gain more users, more advertising dollars are being directed to our platform. Our full-year advertising revenue reached to $4.5 billion, up 145% year-over-year. spearheading our top-line growth. We firmly believe the value of our community is tied closely with the scale of our users and their level of trust in our platform. There is no doubt that our Gen Z Plus users are the most valuable group in the market. They are our society's backbone and the mainstream consumers in all kinds of economics. Our engaging community connects and tightly bonds those users to our platform, creating an invaluable relationship built on trust, which leads to multiple avenues for commercialization. Looking at our plan for 2022 in more detail, quality growth will remain our top priority. We will continue to build our multi-category content ecosystem, meeting users' visual demands across various consumption scenarios we remain committed to achieve our user target of 400 million MAUs by the end of 2023. While we grow our user base, we will continue to improve our commercialization capabilities. Specifically, we plan to increase our revenue per MAU by developing more value-added services to meet our users' involving needs. as well as increasing our ad revenue by optimizing our ad products and improve ad efficiency. Our revenue per MAU in 2021 increased by 20% year-over-year and we expect this trend to continue. More importantly, we plan to optimize our capital allocation and effectively control our spending across our business. In 2022, We will strengthen our execution and our commercialization capability and aim to narrow our loss margins. Meanwhile, we hold RMB 30 billion in cash reserves as of the end of 2021. This gives us ample liquidity to support our long-term growth strategy and provides a strong cushion in the evolving industry landscape. With that overview, I'd like to go through some details of our fourth quarter operations as they related to our content, community, and commercialization. PUGBs continue to be our most prevalent feature, accounting for nearly 94% of our video views in the fourth quarter. As the bedrock of our ecosystem, we are actively expanding our PUGB content categories and scenarios to grow and test our community together. Our top categories in the fourth quarter were lifestyle, games, entertainment, anime, and knowledge. Our active users inspire our creators and vice versa, creating a respectful community environment that fuels our virtuous cycle. In the fourth quarter, over 3 million monthly active creators submitted nearly 11 million video creations. That makes 58% more creators and 83% more submissions compared with the same period last year, outpacing our user growth. Content creators with more than 10,000 followers increased by 41% in the fourth quarter, showing that our community connections were tighter than ever. We have continued to refine our algorithm and create avenues to unlock content creators' commercial value. making sure they are seen, recognized, and well rewarded. In January, we honored top 100 content creators at the fourth annual Bilibili Power Up 2021 award ceremony. Notably, in 2021, over 1.3 million content creators received monetary rewards through various channels on Bilibili, covering near 90% of content creators with over 10,000 followers. Primarily, payment channels include our cash incentive program, live broadcasting, the SPACO ad platform, and the direct tipping from users. By the end of 2021, over 550,000 content creators had enrolled in our cash incentive program. On top of native ads on our SPACO platform, We plan to launch more accessible and scalable ad tools and functions within or around the video play frame to help better monetize content creators' private domain traffic. As part of user growth strategy, we are upgrading our content ecosystem with a few different ways. The first is expanding our category outreach to appeal to different gender, occupations, and age groups. Each of these groups brings us more avenues for growing our user base. For example, we are advancing our positions in the student community, adding more female-oriented content, and expanding our paid knowledge libraries appeal to mature users. Secondly, we are broadening our video formats to address users' needs in different access scenarios. Specifically, We are optimizing our short-form video story mode to fit into users' fragmentation time. The initial feedback from our community is encouraging. It's not only satisfied content needs for users on the go and boosts engagement levels, but also helps the user discover even more POGVs and live broadcasting content across our video universe. Additionally, our Smart TV app that extends to living rooms is meeting our users' needs for immersive video experience on live screens. This initiative can add to play in scenic with our brand proposition. All the videos you like, anywhere, anytime. For our OGV department, expanding our OGV category is helping us attract new users. convert users to premium members, and create valuable IP assets. Two main areas of focus will be Chinese Enemy and the documentary. In November, we announced the 51 new Chinese Enemy titles at our fourth Made by Bilibili Chinese Enemy press conference. As an imaginative art form, we believe that Chinese Enemy can transcend priorities of gender, race, and language. With our increasing global appeal, we also officially upgraded our Chinese enemy proposition to Made by Bilibili, Made for Global. We are delighted to see our Chinese enemy being highlighted for its originality, long-tail IP asset value, and our successful globalization initiatives. Over the past two years, we have established partnerships with Netflix and Sony, distributing 24 titles in overseas markets. In 2021, our top-rated anime titles were The Daily Life of Immortal King Caesar 2 and Link Click, which not only won the hearts of Chinese fans but also reached over 100 countries' anime markets. We also hosted our first documentary press event in December and announced a plan to produce 21 new titles in the coming years. As our flagship content category, documentaries represent our useful content. In addition to commercial value, it also brings great cultural value and represents our commitment to social responsibility. Some of our doc series have already turned into important IPs. In January, the return of our reading documentaries, and yet the book and police station reality show the guardians of Jiefangxi were both met with great enthusiasm. Turning to our community. Community surrounds and grounds our ecosystem. Our users and content creators form tight bonds and interactions create trust, a strong sense of belonging, inspiration, and retention value. we actively cultivated a fun, informative, and friendly environment where users can express themselves in a supportive community. For the fourth quarter, we had remarkably high engagement and interaction levels, showing that both new and experienced members are finding connection and fun on Bilibili. As mentioned previously, in Q4, the average daily time spent on Bilibili reached 82 minutes, the highest fourth quarter usage time in our operating history, and the daily video views soared to 2.2 billion, up 80% year-over-year. Monthly interactions in the fourth quarter more than doubled from the same period in 2020, jumping into 10.1 billion. We exceed the year with 145 million official members, a 42% year-over-year and a strong 12-month retention rate of 84%. Now let's look at our commercialization program. In the fourth quarter, our total revenues reached RMB 5.8 billion at 51% year-over-year, and our full-year revenue grew by 62% to RMB 19.4 billion. Revenue per MAU will only be 77.6% in 2021, up 20% year-over-year. Having gathered half of China's Gen Z Plus population on our platform and understood their needs, we believe we can consistently improve our commercialization capabilities and continue to increase our revenue per MAU. Beginning with our mobile game business. Under the current game industry environment, Our goal for 2022 is clear. We will enhance our current domestic game operations while we continue to focus on selectively developing games in-house and overseas game distribution. As for our game pipeline, we currently have five titles approved for domestic release and 13 titles slated for international release in the coming quarters. For the fourth quarter, our mobile game revenues will be 1.3 billion, up 15% from the same period last year. We released four new titles domestically and three new titles in overseas market during the quarter. Meanwhile, many of our older games were still showing long life cycles. Revenues were still on the rise for some of our exclusive licensed games, such as Azula Live. As a game operator, We continue to protect young players from game addiction and promote healthy game behavior following the anti-addiction measures we launched early on for teenage players. In 2021, our revenue from players under 18 years old account for less than 1% of our game revenues. Looking at our vast business, our vast business remains strong with revenues of RMB 1.9 billion in the fourth quarter, up 52% year-over-year. VAST revenue per MAU, or RMB 27.8 in 2021, up 34% year-over-year. As we develop more products and services based on our users' entertainment needs, we believe VAST has great growth potentials, beyond live broadcasting and premium memberships. we will actively explore innovative avenues within our community to increase best revenue per MAU. Live broadcasting, as an organic component of our video content ecosystem, has formed multiple self-reinforcing regulations within our community. For example, we see great synergies between content creators and live broadcasting hosts, as well as their commercialization opportunities. In 2021, Over 70% of our content creators with many followers were live broadcasting hosts. Over 600,000 content creators generated income through live broadcasting during the year. In 2022, we will continue to explore innovative ways to incorporate live broadcasting with our video community and enhance users' overall experience. Turning to our premium membership business. By the end of the fourth quarter, the number of premium memberships reached an exciting milestone of 20 million, representing an increase of 39% year-over-year. Notably, near 80% of our premium members signed up for an annual or continuous monthly plan, demonstrating their love and trust in our platform. As for advertising, our advertising business did a great demonstration of how our value comes from our users and strong trust between them and the community. We hit another home run with advertising services in the fourth quarter. Ad revenue in Q4 reached RMB 1.6 billion, up 120% year-over-year. Full year ad revenue coming at RMB 4.5 billion, up 145% year-over-year. Ad revenue per MAU in 2021 was RMB 18.1, up 83% year-over-year. With nearly half of China's Gen Z Plus users on platform, Bilibili has become a must for advertisers looking to reach this golden consumer group. Video-based integrated marketing campaigns have emerged as a key solution. In 2021, more of our native ads went viral, alerting even more advertisers to our powerful content and its influence among users. In 2022, we plan to further integrate our Sparkle ad platform with more scalable ad products. This will enable native ads to gain more exposure while realizing more efficient and smooth sales conversions on Bilibili, achieving the efforts of brand and performance ads in one shot. Additionally, we plan to enrich our ad display scenarios with Story Mode and Smart TV. greatly increasing our ad inventory and offering more place for advertisers to reach their desired customers. We are glad to see our integrated marketing campaigns have been welcomed by more and more new industries. In 2021, we welcomed a well-known consumer brand, an appointment automotive group, and our key sponsors of the New Year's Eve Gala. In the fourth quarter, Our top five advertising verticals were mobile games, e-commerce, 3C and digital products, food and privilege, and automotive. As we move through 2022, we expect visualization to continue paving the way for massive industry opportunities for work. We will continue expanding our user base as we believe we are still in the initial stages of ramping our money commercialization efforts. In 2022, we will work to generate more revenue per MAU by introducing more value-added services to our users and valuable ad products to our partners. At the same time, we will focus on expense control and overall operating efficiency improvement. This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the fourth quarter of 2021 and outlook for the first quarter of 2022. Total net revenue for the fourth quarter was RMB 5.8 billion, up 51% from the same period of 2020. We continue to see a more balanced revenue mix driven by our diversified commercialization channel. Our total net revenues breakdown by revenue stream was approximately 22% mobile games, 33% VAT, 28% advertising, and a third 17% e-commerce and other venues. Cost of revenues increased by 62% year-over-year to RMB 4.7 billion. Revenue sharing costs, a key component of cost of revenues, were RMB 2.4 billion, representing a 91% increase from the same period in 2020. Gross profit increased by 16% year-over-year to RMB 1.1 billion, and our gross margin was 19% in the fourth quarter. Total operating expenses were RMB 3.1 billion, up 68% from the same period in 2020. Sales and marketing expenses were RMB 1.8 billion, representing a 73% increase year-over-year. The increase was primarily attributed to increased channel and marketing expenses to promote our app and brand, as well as promotional expenses for mobile games. Moving into 2022, we aim to actively manage and control our marketing spending and improve our overall operating efficiency. GNA expenses was RMB 538.1 million, representing a 57% increase year-over-year. The increase was primarily due to increased headcount in GNA personnel, share-based compensation expenses, allowances for downfall accounts, rental expenses, and other G&A expenses. R&D expenses was RMB 797.6 million, representing a 65% increase year-over-year. The increase was primarily due to increased headcount in research and development teams and share-based compensation expenses. Net loss was RMB 2.1 billion for the fourth quarter of 2021, compared with RMB 800 billion $43.7 million in the same period of 2020. Adjustment and loss, which are non-GAAP measures that exclude share-based compensation expenses, amortization expenses related to intangible assets acquired through business acquisitions, income tax related to the intangible assets acquired through business acquisitions, and the loss of fair value change in publicly traded companies was RMB $1.7 billion. compared with RMB 0.7 billion in the same period of 2020. Basic and diluted net loss per share was each RMB 5.34. Adjusted basic and diluted net loss per share was each RMB 4.22. For the full year of 2021, our total net revenues increased by 62% to RMB 19.4 billion. Notably, non-game revenue for 2021 grew 99% year-on-year. accounting for 74% of the total revenue. Gross profit for the 2021 full year increased 42% to RMB 4 billion. Net loss for 2021 was RMB 6.8 billion compared with RMB 3.1 billion in 2020. Adjusted net loss for 2021 was RMB 5.5 billion compared with RMB 2.6 billion in 2020. Basically, diluted net loss per share for 2021 was RMB 17.87. This compared with RMB 8.71 in 2020. Adjusting basically diluted net loss per share was RMB 14.42 compared with RMB 7.4 in 2020. As of December 31, 2021, we had cash or cash equivalent time deposits and short-term investments of RMB 13.2 billion, compared with RMB 12.8 billion as of December 31, 2020. Driving long-term values for all of our stakeholders remains our broader objective. We are pleased to announce an up to US $500 million share repurchase program in the next 24 months. Our Chairman and CEO Chen Rui also expressed his intention to use his personal funds to purchase the company's outstanding ADS for up to US$10 million in the next 24 months. With that in mind, we are currently projecting net revenues for the first quarter of 2022 to be between RMB$5.3 billion and RMB$5.5 billion. Thank you for your attention. We would like now to open the call to your questions. Operator, please go ahead.

Thank you. To ask a question, you will need to press star 1 on your telephone. For your question, press the pound key. For the benefit of all participants on today's call, if you wish to ask your question in management in Chinese, please immediately repeat your question in English. Please limit your questions to one at a time. If you wish to have follow-up questions, please rejoin the queue. Please stand by while we compile the Q&A roster. Our first question is from Li Zhang with Bank of America Merrill Lynch. Your line is open.

Hi, Mr. Guan. Good evening. Thank you for accepting my question. The first question is about the strategic focus of our company in 2022. Thank management for taking my question. Firstly, a high-level question on your strategic focus in 2022. And thank you. The user said, what's our outlook in user growth for 2022 and how should we achieve our user targets? And relate to that, any color on the fourth quarter's user and community development. Thank you.

In 2022, the company's strategy will still be around growth, including user growth, income growth, and we will continue to have a healthy growth trend.

Our key word for 2022 will still be focused on growth. Growth on the user side, on the revenue side, and most importantly, we want to remain the growth quality. We want to keep it a high quality growth.

We can see that in Q4 last year, our users still maintained a healthy and high-speed growth. Our MAU is 2.72 billion, which is a 35% increase. For example, in Q4, we maintained a very high quality user growth rate. Our MAU reached 272 million.

of 35% year over year. And most importantly, the healthiness of that MAU is very strong. For example, the average daily time spent per DAU reached 82 minutes, and that is the highest DAU time spent we've seen in the fourth quarter operating history.

And on the community engagement side, our monthly interactions go over 120.

16% year over year, reaching 10 billion. And on the retention side, the 12 month retention rate of our official member has further increased to 84%.

And in addition to the increase in numbers, we can see that the quality of our users' conversion pay is also very high. Q4, our paid users increased 37% in the same ratio, which is more than the increase of our MAU. And in 2021, the average monthly paid rate is more than 9%. This figure is also increasing every year. And on top of those engagement numbers, we noticed that all the users that come into our community has effectively converted to our paying users.

In the fourth quarter, the monthly MPUs increased 37% year-on-year, outpacing the MAU growth rate. And our annual paying ratio reached 9%, which is improved from 8% from last 2020 and 6-plus percent compared to 2019. And this is very important. Over the period of growth, we are able to deliver this quality set of numbers to show that we really have delivered a high quality growth rate.

If we look at the future, we are still confident that we will achieve the goal of 400 million MAU in 2023. In the past, in January of this year, in January of 2022, As we look ahead, we still are very, very confident to achieve our 400 million MAU user target by end of 2023. And looking at our general number

Our overall MAU has reached over 300 million milestone. And more importantly, the daily time spent per DAU has reached over 90 minutes. So the momentum, growth momentum remains very, very strong. And we're confident to continue to deliver this high quality, high growth rate set of numbers.

Actually, if we look back in the past, we will find that Among all the Internet products in the world, it is a unique growth model. We have been established for 13 years, and every year there is a continuous growth of high speed and health. I think this is actually a growth model that is proud of our content ecosystem. And I think this growth attitude will continue to continue.

As we look in the past, we think availability is a very unique product across the global Internet landscape. We have maintained a fast and healthy growth rate for the past 13 years. We think that contributes to our powerful content ecosystem-driven business model. And based on this business model, we're still very confident that this growth momentum can continue.

I'm talking about growth. So if we're taking another look at our

growth on the revenue side. For the past two years, we see revenue growth as important as our user growth, especially within our vast and advertising segment. And they have been keeping roughly around 100% young year growth rate.

In 2022, income growth will still be the center of the company's strategy. And it is also one of the most important work of our company. In the past, the balance between user growth and income growth was 7-3 times. User growth accounts for 70% and income growth accounts for 30%. In this year's work plan, we will adjust the proportion of distribution. We will make it 5-5 times. That is, the experience of user growth is 50% and the experience of income growth is 50%. Income growth will become a more important job this year than it was in the past.

As we look into our past work priority or resource allocation in the past two years, the energy we put in revenue growth versus user growth could split to three to seven ratio. And for this year, we will adjust our resource allocation split our energy and resource equally into both revenue growth and user growth. In other words, revenue growth will play a much more important role across our work priorities.

It's fluctuating in terms of stock price, but from another perspective, it actually also relieves the internal roll of the industry to a certain extent, which is the investment of this cost in each company, whether it's the investment of the market or the investment of this manpower cost. It used to be a very strong internal roll, but this year I think the internal roll situation will be greatly relieved. We will also take this opportunity to control the cost and reduce the cost-effectiveness.

And on the other hand, we've noticed that there's been a fluctuation in the capital market. There's been a fluctuation on the stock price as well. And from another perspective, this is actually helping the overall industry to reduce the rat race. For example, on the sales and marketing side and compete for talent side, there's been a very heavy, intense rat race across the sector. And we believe that situation will elevate, alleviate this year. And we'll pay more attention to control our expenses and reduce our costs and improve our overall efficiency, putting every dollar we spend into more use. So that's all the answers.

Our next question comes from Alex Yao with JP Morgan. Your line is open.

Hello, everyone. Thank you for accepting my question. I would like to ask about the story mode. For example, can you share the current penetration rate of this product? And in the long term, what kind of role does the story mode play in our ecosystem? Finally, what kind of thoughts do we have on the transformation of this product? Then I will translate it myself. Good evening, management. I'd like to ask a couple of questions on a relatively new product, Star Remote. Can you share with us some of the latest thoughts around the product penetration rates and then what kind of the role you want this product to play in our content ecosystem over the medium to longer term? Lastly, how do you guys think about the monetization potential and the revenue model for this product? Thank you.

The product story mode actually has already been online last year.

However, our users really, they can't tell, they don't know the product name is called Story Mode because it's integrated in our overall user interface. It's naturally embedded in our recommendation feeds to satisfy users' needs for this certain product.

其实做Story Mode的原因是因为我的理念, 我认为B站一直不是一个工具, 它是一个以人为中心的社区。 Therefore, for Bilibili's consumer scene, it must be multi-scene and multi-screen. It is not limited to medium-long video, and it is not limited to horizontal video. It can have short video, live broadcast, and vertical video. Therefore,

The reason why we started the story mode, because from my personal perspective, I think Bilibili should not be a tool. It should be a video community surrounded with people's needs. And that means may involve multiple scenarios on multiple screens, whether it's mid to longer form, whether it's in the horizontal format. We believe those content can be shorter and they can also be in a vertical format. It could also be live broadcasting. And addressing this trend or our understanding to users' needs, we launched the story mode to supplement our application scenarios.

Actually, I remember when I was reporting last week, I also mentioned our big screen, that is, the TV screen. Actually, this is the same concept. The big screen, the TV screen, is an extension of our living room. And this story mode is actually an extension of our green consumption and fragmented consumption.

In the last earnings report call, we mentioned our initiatives on the Smart TV site. And those initiatives are in adapt to this multi-scenario strategy, which we are putting our content into people's living rooms. And for the adoption of story mode, we hope to satisfy users' on-the-go entertainment needs in their fragmented time.

If you have used the Story Mode of Bilibili, you will find that although it is a digital playback on the interface, it looks similar to Douyin at this point, but the actual experience it uses is 100% Bilibili characteristics. For example, most of the videos in Story Mode are minute videos, which is our Story Mode.

So if you have used storing mode, you would notice even though the user interface is in a vertical format, might look like a Douyin product. However, the actual experience will be full Billy Billy featured experience. For example, on our story mode, there's content range from one minute, two minutes, three minutes, minutes, and the quality is similar to our PUGV, and there will be fully chat flying across the screen.

Then on the content category, we can think that story mode is actually an extension of our PUGV ecosystem, that is, a lot of story mode The creator of the video is the creator of our Pugv. Then in this part, it is equivalent to our creator using another way to create a video in a shorter period of time.

On the content category, we can see Story Mode as a very natural extension to our POGV ecosystem. Massive number of Story Mode videos have been produced by our POGV content creators. In another way, it's just those content creators are leveraging this new outlet and new tools to create content.

In terms of product development, we have always focused on users. So, the progress of Story is also based on the needs of users. From the current point of view, our users have a very high degree of acceptance of Story Mode. Now, Story Mode has reached more than 20% in the infiltration of DAU. Moreover, On our product philosophy, it always has been surrounded by users.

and the product progress follows our users' needs towards video content. From several data points, we noticed that the adoption of story mode has been widely accepted by our users. On a DAU level, the penetration is over 20%, and over 30% of those views will be subject to the thumbs-up, the likes. which means our users are accepting and loving this new product.

I always think that users' consumption choices for content follow the category and community atmosphere, rather than choosing a form of expression or a length of a video. Just like people who like coke, they don't care if the coke is in a can or a bottle. Or people who like to drink carbonated drinks They don't care if the coke is black or white What they like is actually the category and the atmosphere of the community So I think the future of story mode It must be completely integrated into our category content and community In my opinion, its penetration rate should be more than 50% in the future Even higher because In summary, we think the user chooses content

It's largely based on the content category and the overall community experience, not by the lens of it. For example, a Coke lover would not care if the Coke is in a can or in a bottle. A soda lover wouldn't care if the Coke is black and Fenda is white. And all in all, It's the category, the content category, and the community environment is helping users to decide which product they follow. And in my view, I think story mode is a product can be fully integrated, immersed in our content category as well as our community. In the not so distant future, the penetration could go could potentially reach to 50% or even above. Because after all, what attracts users is about the content category itself, not the length of the content, or whether it's in a vertical format or in a horizontal format.

Finally, let's talk about commercialization. Because store mode is a display mode of a digital video on a mobile phone, and this display mode Lastly, on the commercialization potential,

Because Story Mode is a product based on mobile devices and vertical format. So actually, in this industry, the commercialization of this product has been pretty mature, whether it's on the distribution of advertisement or it's traffic entrance for live broadcasting services. It's just about our implementation on the execution of our commercialization strategy. And based on our initial testing and initial data, we've noticed that it has very good efficiency, distribution efficiency to commercial ads as well as our live broadcasting services. That would be all.

Our next question comes from Alex Poon with Morgan Stanley. Your line is open.

Thanks management for taking my question. My question is related to our losses controlled in 2022. including how will our gross margin trend from Q1 to Q4 this year, assuming we don't get any game license approval, and also the bisegment gross margin trend for including advertising and live streaming, how would that change this year, and our headcount expansion plan, and also the timetable for even and profitability. Thank you very much.

Thank you, Alex. Let me take the discussion. You are right. We agree that profitability is a key objective for all the companies. Our company, we believe in long-term sales. We strive to find a balance between achieving a break-even point and investing for long-term opportunities, rather than just pursuing certain short-term financial metrics. we believe by doing so it will maximize the interest of our shareholders. As mentioned by our CEO, we are confident that maintaining a healthy user and revenue growth, the non-GAAP operating loss ratio could be narrowed on year-over-year basis starting from 2022. By improving the monetization efficiency, increasing the revenue per MAU, and control the operating expenses. The target is to achieve the break-even point on a non-GAAP basis by 2024. Let's look into the details. First of all, we aim to proactively manage our operating expense. Selling marketing expense, for example, is measurable and controllable. For example, the user acquisition cost is a big component of our sales marketing expenses only increased by 50% while our total revenue increased by 61% the over year in 2021. There's still room to further optimize the marketing spending while we reach 400 million MAU target. We expect the total selling marketing expenses as a percentage of revenue will decline starting from 2022. And R&D expenses Many include the personnel cost associated with developing the new games, enhancing the data capabilities, and optimizing the new product features, which are critical to increase our productivity and monetization capability. Understood the importance of attracting talents. In 2022, we will continue to invest in R&D, but we will closely monitor the ROI for all of our R&D projects. We expect that R&D expenses as a percentage of total revenue will start to show significant leverage from 2023 onwards. Secondly, there are still empty room for improvement in user monetization efficiency. We are still in a very early stage of commercialization. Our revenue per MAU increased by 20% last year. The increase was mainly driven by 34% increase in VAS revenue per MAU and 83% increase in ad revenue per MAU. Looking forward, those trends will continue and we expect both VAS and ad revenue per MAU will have potential to double their current levels in three years. Last but not least, as you asked, the gross profit margin. While our game business undergoes a transaction period, we are happy to see revenue contribution from advertising has risen from 13% in 2020 to 23% in 2021 and expected to further increase in 2022, in this year. In addition, we expect to introduce more VAS services and further improve the VAS gross profit margin. As a result, with the improvement of our commercialization capabilities, I think the overall, the 2022 gross margin is expected to be slightly lower in Q1 this year, but will gradually improve during this year. And in the three years, the overall gross profit margin will be improved around 30% in three years. That will be all.

And for the HECON, I'll translate for Mr. Chen's remarks. So, Alice, what is the plan for the total number of employees this year?

In fact, in terms of the growth of the number of employees, we have been in a slow state in the past few years. The growth of the number of employees this year will be very limited. Because we are also looking at the entire HECON this year. Actually, in the past few years, the growth rate has slowed for the number of our staff. And as for 2022, there's going to be a very limited headcount increase. My request for our HR

this year is laser focus on the business areas that we wanted to have decent growth. And for those areas, we can add certain headcounts. And the rest of the business is controlled.

Our next question is from Felix Liu with UBS. Your line is open.

Good evening, Manager Chen. Thank you for accepting my question. Congratulations on Q4 performance, especially on the performance of our advertising department. I would like to ask about Q4's first quarter and the growth of advertising business in 2022, especially considering the recent market concerns about the red light and the game version number. In addition, can you share about the commercialization of our advertising and the strategy? Are there any new updates in 2022? Thank you, management, for taking my question. And congratulations on the 4Q results, especially on the strong ad performance. I would like to ask a question on the ad outlook for 2022, as well as on the first quarter, especially in the light of recent macro weakness, as well as the temporary suspension in new game license. And also, could you elaborate on your key commercialization initiatives for advertisements for 2022? Thank you.

There are a few people who suspect that Bilibili's user experience is so good that a product with a good user experience cannot be advertised. But in fact, our advertising growth is still quite fast. I also take this opportunity to say that I think the first one is that our users are growing, and at the same time, our single user conversion efficiency on the advertising side is also growing. As I mentioned just now, our DAU has been growing in the past few years. In the fourth quarter of last year, our DAU increased by 34%. At the same time, the efficiency of advertising transformation for each MAU is also increasing. In 2021, the value of advertising transformation for each MAU increased by 83% compared to the previous year. Therefore, these two pluses are a higher rate of advertising growth.

I would like to take this opportunity to share with you the growth driver behind Bilibili's advertisement business. And you may see in the past few quarters our advertisement revenue has been growing over 100%, has been very strong, and we've also heard suspicions from the market that Bilibili's user experience is so good, how can you drive your advertising revenue without compromising user experience. So the number one reason is that we have experienced a very strong user growth. At the same time, our ad efficiency per user has also been increasing pretty nicely. In the fourth quarter, our DAU grew 34% year over year. And on a full year level in 2021, the ad revenue per MAU has increased 83%. And for those two factors combined together, that gives you the over 100% ad revenue growth.

Yes, the second growth momentum, I think, We can see that in the past few years, we have seen an increase in the number of users on the horizontal axis. On the vertical axis, That's why we can see that as the users break through the circle, more and more industry advertisers will find us. For example, before it was a game, 3C, and then it became, for example, food and drink, and then it became beauty and makeup. And the second growth driver would be the value of the user has been increasing. And at the same time, the influence of our platform

has been well recognized by the market. We look in the past few years on the horizontal perspective, our user has been growing pretty nicely. And in a vertical view, we actually have constantly breaking up our own circle and allowing more user, more different groups of user, occupation, gender, user being seen and recognize the existence of Bilibili, and that leads to more attention from different advertising versions. For example, in the past few years, our leading verticals would be games and 3C digital products, and this slowly expands to skincare and cosmetics, food and beverage, and for this year, we are looking to expand into verticals like automotive. As a matter of fact, in fourth quarter last year, automotive has become our top five advertising industry verticals.

The third driving force, I think, is the trend of advertising in the form of videos. More and more advertisements will be shown in the form of videos. So Bilibili is also based on the form of our products. We will develop a model similar to TopView. We will also have the form of video advertising. And the third growth driver would be the visualization of advertisement. More and more advertisement will be presented in the format of video.

And that's why we are adopting this trend, launching product like top view, different advertising format based on our different video formats, including native ads, story mode. In the launch of story mode, it will also be adapting to current industries, the advertisement video in a vertical format. And all of this will help us to drive our advertising growth in the next few years.

I think the fourth motivation is that Bilibili has its own characteristic form of advertising, that is, native advertising. Because most of Bilibili's videos are made by advertisers, they will incorporate their own creativity into the advertising, and add this customized advertising to their own videos. This is what we call the commercial ad of the app owner. And I think in 2021, we can clearly feel that this kind of original advertisement will be accepted by more and more advertisers. At the end of 2021, the number of brands that joined our platform has exceeded 4,200, and the return rate has reached 75%. And the fourth growth driver would be our own unique advertising format, aka our native ads. The building native ads

largely were produced by our content creators. They're actually combining their creativity to customize an advertisement within its own video. It's known as our Sparkle Native Ads. We're delighted to see more and more advertiser has been adapting and recognize this innovative format of advertisement. In 2021, In the fourth quarter of 2021, over 4,000 advertisers have been invested in our Sparkle ad platform. The repeated purchase rate has reached 75%. On the other hand, more and more content creators have signed up for our Sparkle platform. In 2021, over 22,000 content creators has signed up on our Sparkle platform to open themselves to this native ads opportunity.

Yes, I have always thought that native ads, that is, our flower system, is a very, very important advantage to Bilibili. Why? Because it is an advertiser's reservoir. That is, tens of thousands of upholders will keep many brand advertisers in this reservoir. We think the native ads is a very, very important format of advertisement for Bilibili. It's like a reservoir for us to keep

The advertisers, the native ads, the content creator is helping us to attract those advertisers. They're staying with us. What we need to do next is to further integrate the native ads with more of our standardized, scalable advertising formats to allow native ads to help us to drive the sale of our other standard advertisement products.

Lastly, the last growth driver would be the multi-scenario, multi-screen strategy. We believe by further integrating those scenarios and devices,

We can help us to open more ad inventories and improve our overall ad efficiency.

We can see from the data that while the volume of our traditional PUGV is growing rapidly, our newly expanded TV screens and storage are also growing rapidly.

From a data perspective, as our PUGB continues to expand rapidly, the new territory, which is the smart devices, smart TV, and store remote, is helping us open up more scenarios, more devices, and more video content and leverage for commercial advertisement opportunities.

I always think that advertising income and user experience are not conflicted. And from a long-term perspective, they are even consistent. Why? Because in the end, the effect of advertising needs to be realized by influencing the user's mind. And a good platform, a platform that users love, can even more affect the user's mind.

In summary, I've always believed that the increase in revenue does not conflict with user experience. In other way, it actually shared the same goal because we believe the fact of an advertisement largely depends on the platform's influence among users' mindset. And a good platform can really put that influence to its users. Hence, the goal is connected.

Let's talk about the outlook for 2022. In the industry, it is generally believed that the macroeconomic situation of 2022 is still under pressure. And the growth of the entire digital advertising market is slow. As for the outlook for 2022, despite the macro environment headwind,

and slowdown of digital advertisement. Because of those five growth drivers I mentioned earlier, we are confident under this environment, we can still deliver a healthy, stable ad revenue growth, at least above industry average. That would be all.

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.

Thank you once again for joining us today. If you have further questions, please contact me, Julia Yang, Availability Executive IR Director, or TPG Master Relations. Our contact information for IR in both China or in the U.S. can be found on today's press release. Have a great day. Thank you. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now disconnect.