Bilibili Inc.

Good day and welcome to Bilibili's second quarter 2022 financial results and business update conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Juliet Yang, Executive Director of Investor Relations. Thank you. 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 the SEC and Hong Kong Stock Exchange. The non-GAAP financial measures we provide are for comparison purpose only. Definition of these measures and a reconciliation table are available in the news release we issued earlier today. As a reminder, this conference is being recorded. In addition, an investor presentation and webcast replay of this conference call will be available on Bilibili IR website at ir.bilibili.com. Joining us today from Bilibili Center Management are Mr. Ray 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'll 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 2022 Second Quarter Results Conference Call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. We confronted immersed headwinds in the second quarter. During the period, we steadied our company by bringing users improved products, expanding our content, and implementing further cost control measures. With lockdowns in Shanghai lifted in June, we believe the worst impact is behind us. Importantly, we expected to recover our operating margin in the second half of the year while continuing to grow our users and narrowing our net loss. Our total MAUs reached a new record of $306 million in the second quarter, up 29% year-over-year, representing another exciting milestone. While we remain committed to our MAU target, we are putting additional focus on the quality of users, looking at matrix such as DAUs and engagement levels. In Q2, our DAUs grow by 33% year-over-year to 84 million, outpacing the growth rate of our MAUs. This brought our DM ratio to 27.3% up from 26.4% in the same period last year. Daily average time spent was 89 minutes, a nine-minute increase compared with the same period last year. Longer user time spent and high user activity increase our total user traffic, which grew by 48% year-over-year. We believe our growing matrix of products Expanding content library and the quality-driven growth strategy will strategically position us to continue our growth momentum. Impacted by the challenging micro-environment, our total net revenues were on the 4.9 billion, up 9% year-over-year in the second quarter. NPUs increased by 32% year-over-year to 27.5 million, and our paying ratio was 9%. Followed by a slower April and May, our advertising business rebounded nicely when the lockdowns lifted in June. With increasingly popular advertising products, such as ads in story mode, we grew our ad revenue by 10% year-over-year. We expect to continue gaining market share in the second half of the year. During the second quarter, we also put further cost control initiatives into effect. Specifically, we cut sales and marketing expenses by 16% year-over-year. Sales and marketing expenses as a total percentage of revenue decreased to 24% from 31% in the same period last year. Server and brand-wise cost per video views also declined by 37% year-over-year. Other adjustments we made to improve our organizational efficiency included canceling underperforming projects and reallocating resources to co-branders. We expect positive impact to our P&L will start to show in the second half of the year. In July, we also made some pivotal adjustments to our organization. Our goal was to be more congruent to our long-term sustainable growth. we have integrated the operations of live broadcasting with our video platform and made organizational changes that integrate our commercialization efforts across our content ecosystem, create synergies and improve efficiency. With that overview, I'd like to go through some details of our second quarter operations across our content, community and commercialization. We have seen many iterations of the online video space. Ours is the one that has remained expansive and transcending. The introduction of our different formats, such as Story Mode, POGV, Live Broadcasting, and Smart TV, significantly boost our signal of all the videos we like anytime, anywhere. Looking at Story Mode as an excellent example, The story mode is one of our newest verticals covering users on the go entertainment needs. It is more efficient in distributing video in shorter length of time. While video views from PUGV grow 53% year over year, video views from story mode increased by over 400% year over year, bringing incremental traffic to our platform. This is an ongoing trend that we are seeing throughout the second half of the year. Moreover, story mode presents a parallel commercial prospect as a gateway to different monetization opportunities, such as advertising and live broadcasting. MAU penetration in live broadcasting continues to grow across our user base. In July, we began to fully integrate our live broadcasting and POGB ecosystems. Over time, we expected the combination of these two ecosystems to result in more efficient traffic execution and allocation, and inspire more content creators to become live broadcasting hosts. During the second quarter, our users primarily gravitated to lifestyle, games, entertainment, ACG, and knowledge categories. We continue to accumulate a massive amount of content through our growing pool of talented creators. In the second quarter, we had 13.2 million total monthly average content submissions of 56% year-over-year. Our growth stems from our 3.6 million monthly active content creators and increase of 50% year-over-year. In the second quarter, The number of creators with 10,000 followers grew by 46% year-over-year, and creators with over 1 million followers grew even faster, at 58% year-over-year. Notably, over 60% of content creators who gained 1 million followers during Q2 were benefited from the fast-growing story mode traffic. We continue to expand avenues to unleash content creators' monetization potential. In the second quarter, over 1.1 million creators received the monetary rewards through live broadcasting, advertising programs, or cash incentive programs, up 97% from the same period last year. Turning to our community, we continue to feature robust content that resonates with our users along with a welcoming community environment. We saw this across our user matrix in the second quarter. with impressive year-over-year gains. Daily video views grow by 83% to 3.1 billion, and the monthly interactions grow by 73% to 12.5 billion. As I previously mentioned, the average daily time span also increased by nine minutes year-over-year to 89 minutes. Now, let's take a look at our commercialization effort. Advancing our commercial prospects is one of our leading goals this year. In the second quarter, we continue to convert paying users and improve our advertising efficiency to gain more market share, maximizing our high-quality user base. Looking first at vast business, net revenues for vast was RMB 2.1 billion, an increase of 29% year-over-year. we converted more traffic to paying users in the second quarter, driven primarily by our live broadcasting, where we hold unique advantages given this natural extension of our video universe. Despite the challenges of stricter regulations, our live broadcasting conversion rate remains strong in the second quarter. By integrating our POGV ecosystem with live broadcasting, we have created a win-win solution. The number of active live broadcasters increased by 107% year-over-year in the second quarter. Our live broadcasting MAUs penetration rate continued to grow, and MPUs for live broadcasting increased by nearly 70% year-over-year. At the same time, we improved the live broadcasting scores margin by optimizing revenue sharing plans. Premium membership for the second quarter reached 21 million, up 19% year-over-year. The majority of our users continue to be annual or auto-renewal subscribers. Looking at our advertising services, revenues from this segment reached RMB 1.16 billion, an increase of 10% year-over-year. Despite the micro-high winds, our top five verticals in the second quarter like games, digital and 3C products, skincare and cosmetics, e-commerce, and food and privilege. Optimizing our product offerings and conversion efficiency remains our strategy for our ad business. In the second quarter, we continue to dedicate our resources to expand our advertising scenarios with diverse products and improved conversion modules. We also executed our integrated marketing campaigns as selling strategy to realize more cost-selling opportunities. The story mode ads we launched in April have also been welcomed by our advertisers. Lastly, on game spendings, net revenues were RMB 1.05 billion in the second quarter. The lack of supply for new game content in the domestic market was the main challenge in the first half of the year. As the domestic game approval process returns to normal, we look forward to seeing approval for imported titles. Nevertheless, our game strategy remains focused on the in-house development and bringing exciting, high-quality games to both domestic and international markets. In the second quarter, Our self-development game revenues contributed around 5% of total game revenue, mainly thanks to our successful launch of Artery Gale in many countries and regions. And for our pipeline, domestically, we are actively applying for game licenses and have four titles approved for release. Six games in our pipeline, including two self-development titles, are ready to hit overseas market in the second half of the year. As a 13-year-old company, our user numbers and revenues are still seeing robust growth, and we foresee a long runway of growth in this future. Our attention and resources are focused on improving both our top line and bottom line. With this in mind, we plan to further enhance our operational efficiency, tighten spending, and strengthen our execution. We are committed to improving our growth margin and narrowing our operating loss in the second half of the year. This concludes Mr. Chen's remarks. I will now to provide a brief overview of our financial results for the second quarter of 2022 and outlook for the third quarter of 2022. Total net revenues for the second quarter was RMB 4.91 billion, up 9% from the same period of 2021. Our total net revenue breakdown by revenue stream was approximately 21% mobile games, 43% VAS, 24% advertising, and 12% e-commerce and other business. Cost of revenues increased by 19% year-over-year to RMB 4.2 billion. Revenue sharing cost, a key component of cost revenues, was RMB 2.1 billion. representing an 18% increase from the same period in 2021. Server and bandwidth cost, as part of a relatively fixed cost component, decreased 9% quarter over quarter. Server and bandwidth cost per video views decreased 37% year over year, demonstrating the impact of ongoing efforts and the progress in cost savings. Our gross profit in the second quarter was RMB 738 million and our gross profit margin was 15%. We are actively tightening our cost control measures and improving our operating efficiency. We expect our gross profit margin will start to recover beginning this quarter. Total operating expenses was RMB 2.9 billion, up 17% from the same period in 2021. Sales and marketing expenses for the RMB 1.2 billion, representing a 16% decrease year-over-year. Sales and marketing expenses as a percentage of total revenue, or 24%, down from 31% in the same period last year. The year-over-year decrease was primarily attributed to decreased promotional expenses for mobile games, as well as lowered user acquisition costs. G&A expenses. was RMB 626 million, representing a 44% increase year-over-year. The increase was primarily due to increased headcount in general personnel, higher rental expenses, and the non-recurring expenses related to optimizing our organizational structure. R&D expenses was RMB 1.1 billion, representing a 68% increase year-over-year. The increase was primarily due to increased headcount in research and development, increased the share-based compensation expenses, and non-recurring expenses related to adjustment of certain GAM projects. Net loss and adjusted net loss was RMB 2.0 billion and RMB 1.96 billion for the second quarter of 2022, respectively. Turning to our capital allocation and the liability measurement. In aggregate, we repurchased a total 2.6 million ADS for a total cost of US$53.6 million at the end of June 30, 2022. In addition, we repurchased a total of US$275 million 2026 notes for a total cost of US$198 million with total future cash savings of US$84 million at the end of June 30, 2022. And as of June 30, 2022, we had cash or cash equivalent time deposits and shorting investments of RMB 24.9 billion. compared with RMB 13.2 billion as of December 31, 2021. As for our intent to convert to a due primary listing on the main board of Hong Kong Stock Exchange, with respect to the proposed conversion, we successfully obtained all necessary shareholders' approval at our company's annual general meeting, which was held on June 30, 2022. The Hong Kong Exchange has also acknowledged our application, setting October 3, 2022 as the proposed effective date. Our endeavor will expand our access to a wider investor base, and we expect to concurrently maintain our listing status on Nasdaq. With that in mind, we are currently projecting net revenues for the third quarter of 2022 to be between RMB 5.6 billion and RMB 5.8 billion. Thank you for your attention. We would now like to open the call to questions. Operator, please go ahead.