Bilibili Inc.

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Good day and welcome to the Bilibili third quarter 2022 financial results and business update conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Juliette Yang, Executive Director of Investor Relations. Please go ahead.

Thank you, Operator. During this call, we'll discuss 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-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 a webcast replay of this conference call will be available on the 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 Lee, Vice Chairwoman of the Board and Chief Operating Officer, and Mr. Sun 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 third quarter 2022 results conference call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. Our community, which is the foundation of our business and key to our long-term success, continues to expand. In the third quarter, DAUs reached more than 90 million and MAUs nearly 333 million, both up 25% year-over-year. Average daily time spent per user was 96 minutes in the third quarter, up eight minutes from the same period last year. With that, the total time spent on Bilibili grew by 37% year-over-year. Having said that, we still face micro-headwinds and uncertainties that run over the industry. To cope with the challenging environment, we have reprioritized our goals and promoted to focus on two key tasks that will help us turn the corner. First, our users. As our MAUs have reached a sizable base of nearly $333 million, we think it is time to shift our primary focus to DAU growth. DAUs not only represent the quality and sustainability of our community, but also directly link to our influential power as a platform, as well as various commercial prospects. particularly in terms of revenue generation from our tithing and vast business. With our improving product offerings and the refined algorithms, we can continue to grow our DAU base and improve our DAU to MAU ratio with reduced sales and marketing spend. Second, we are committed to improving our financials by expanding our growth margin and narrowing our losses. After challenging the first half of the year, revenues in the third quarter grew to RMB 5.8 billion, up 18% quarter-over-quarter and 11% year-over-year. In the third quarter, we continued to take various actions to tighten our spending. Gross margin improved to 18%, up 3% points sequentially. Sales and marketing expenses as a percentage of total revenues were 21%. down 3% points sequentially. Our non-GAAP net loss ratio also narrowed by 10 percentage points compared with the prior quarter. Looking ahead, we will implement a number of additional cost control measures and further rationalize our marketing expenses and headcount planning. Specifically, we are streamlining our investment in R&D and cutting down on projects with lower chance of success and being extra mindful when exploring new opportunities. At the same time, we are centralizing our resources in areas related to improving commercialization efficiency and user experience. These adjustments will be completed by the end of this year. Accordingly, We expect our sales, marketing, and R&D expenses to peak this year and start to decline in 2023, with net loss narrowing further accordingly. With that, I'd like to provide a brief update on our core pillars of content, community, and commercialization. Starting with content. Over the years, as the young generations on Bilibili grow up and enter new stages of life, their interests evolve, driving creators' passions as well as the expansion of our content categories. So on top of our traditional strong content verticals, we have seen emerging categories such as automobile, home decoration, and interior design, and baby and maternity. In the third quarter, 3.8 million monthly active content creators on Bilibili readily accommodated these varied needs, creating near 16 million new videos on a monthly basis of 40% and 54% year-over-year, respectively. The expanding content library drives the overall traffic growth on our platform. Total video views grow by 64% year-over-year, driven by both PUGV and story mode content, which grow by 34% and over 470% year-over-year, respectively. Particularly, with improving content distribution capabilities of story mode, content creators can build their fan base more easily, sharing their content with other kindred spreads on B2B. The virus monetization passes we have cultivated for content creators continue to offer more creators more opportunities to make money while doing things they love. In the third quarter, over 1.2 million content creators earned income through multiple channels on Bilibili, up 74% year-over-year. Looking at our community, we consistently deepen our user engagement in our community with our featured and diverse content. As I mentioned earlier, the average daily user time spent reached a record high of 96 minutes, up 8 minutes from the same period last year. Our monthly injections also increased 41% year-over-year to $14.4 billion. Furthermore, the number of official members on our site was up by 37% year-over-year to $183 million. maintaining a stable 12-month retention rate above 80%. Now let's look at our commercialization and the prospects for near and long-term monetization. First, our vast business. Our vast revenues were the RMB 2.2 billion, up 16% year-over-year in the third quarter. By further integrating live broadcasting with our POGV ecosystem, we maintain our unique platform advantage. We had 67% more live broadcasting hosts in the third quarter this year than for the same period last year. The number of live broadcasting paying users increased by 79% year-over-year in the third quarter. The number of premium memberships for the third quarter grew 12% year-over-year to 28.4 million. In December, we plan to launch our self-produced Chinese anime title, The Three-Body Problems. This highly anticipated title is expected to attract a wide range of sci-fi lovers to our platform. Looking at our advertising, despite softness in microenvironment, Net revenues were RMB 1.4 billion, an increase of 16% year-over-year. We further strengthened our integrated marketing campaign offerings by combining diverse ad products and conversion modules across different video viewing scenarios. Story mode ads, as part of ad offerings, continue to capture more performance-based ad dollars in the third quarter. Our top advertising verticals in the third quarter were games, digital products and home option lines, skincare and cosmetics, automotive, and food and privilege. And for games, our game revenues grow 6% year-over-year to RMB 1.5 billion, largely driven by the new titles we launched in the domestic and overseas market in the third quarter. Developing house distributed globally remains our core game strategy, which has started to bear fruit. Revenue generated from self-development games contributes 9% of our total game revenue in the third quarter. Looking at our pipelines, we have two games approved for domestic release this year and earlier next year, including one self-development title. Five titles are slated to launch in the overseas market early next year. Facing the market's micro-uncertainties, our primary goal is clear, improving our gross profit margin and narrowing our net loss. By expediting our commercialization, we believe our top line can catch up with our community's scale. While we remain committed to our goal of reaching non-GAAP operating breakeven by 2024, we will also actively manage our cash position and liabilities. We believe we can weather through the micro-incentives and emerge as a stronger, more efficient, and more resilient company. This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the third quarter of 2022 and outlook for the fourth quarter of 2022. Total net revenues for the third quarter were RMB 5.8 billion, up 11% from the same period of 2021. Our total net revenue breakdown by revenue stream was approximately 25% mobile games, 38% VAS, 23% advertising, and 14% from the e-commerce and other business. Cost of revenues increased by 13% year-over-year to RMB 4.7 billion. Our gross profit in the third quarter was RMB 1.1 billion, and our gross margin was 18.2%. Gross margin recovered by 3.2% points sequentially, attributable to the top-line growth. We expect to show continuous sequential quarterly improvements in the first quarter and the coming year. Total operating expenses was RMB 2.9 billion. Fractious compared with the same period of 2021. We cut sales and marketing expenses by 25% year-over-year to RMB 1.2 billion. Sales and marketing expenses as a percentage of total revenues was also down to 21%. compared with the 31% in the same period last year. G&A expenses was RMB 543.4 million, a 14% year-over-year. The increase was mainly primarily due to increased headcount in G&A personnel and higher rental expenses. R&D expenses was RMB 1.1 billion, representing a 43% increase year-over-year. The increase was primarily due to increased high-count in R&D and increased share-based compensation expenses. Net loss and adjusted net loss was RMB 1.7 billion and RMB 1.8 billion for the third quarter of 2022, respectively. We successfully narrowed our adjusted net loss ratio by 10% points sequentially in Q3, and we expect the narrowing trend will continue in the fourth quarter and the coming years. Turning to our capital allocation and the liability management, we currently have three outstanding convertible bonds totaling $2.5 billion among which the put rise of $746 million is accessible in June 2023, $429 million is accessible in April 2024, and $1.3 billion is accessible in December 2024. As of September 13, 2022, we had cash and cash equivalents, time deposits, and short-term investments of RMB 23.9 billion, or 3.4 billion US dollars. And we believe this level of liquidity is sufficient to repay the aggregate balance of all outstanding convertible bonds by their respective maturity, without considering any external funding resources available to us. Meanwhile, we are taking further actions to narrow our losses and reaching breakeven. We will be prudent with our KPACs and will closely monitor our cash outflow. At the same time, these convertible bonds are currently traded at discounted price, and we will continue to evaluate the option to repurchase and retail them at a reasonable price. As of October 31, 2022, we had repurchased and retailed a total principal amount of $329 million of these notes for a total cash consideration of $247 million, generating $82 million net cash position. We will stay opportunistic when continuously evaluating options for the best use of our capital. Finally, our conversion from a secondary to a primary listing on the Hong Kong Stock Exchange became effective on October 3, 2022. Bilibili is now a dual primary listed company in Hong Kong and the United States. This conversation will further expand our investor base and provide more liquidity for our securities in the capital markets. With that in mind, we are currently projecting net revenues for the fourth quarter of 2022 to be between RMB 6.0 billion and RMB 6.2 billion. Thank you for your attention. We would now like to open the call to questions. Operator, please go ahead.

Thank you. As a reminder, if you would like to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. That's star 1 1 if you would like to ask a question. For the benefit of all participants on today's call, if you wish to ask your question to 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. Thank you. We'll now take our first question. Please stand by. Your first question is from the line of Daniel Chen from JP Morgan. Please go ahead.

I will translate myself. So in the previous prepared remark, management mentioned that user growth focus will switch into a data active user, DAU. So could you maybe elaborate more about our future user growth strategy? Thank you.

We proposed a user growth strategy in 2019. At that time, our MAU is at 1.1 billion. So, we have always used MAU as a indicator for our users. In the past three years, we have increased from 1.1 billion to 3.3 billion.

We raised the centered around MAU strategy back in 2019. And in the past, we have successfully expanded our MAU from 110 million to nowadays 330 million. And this is quite successful and showed our excellent execution in the past few years.

Well, if we're able to grow three times in the past few years, which supported the thesis that the Bilibili's business model, which is the

community plus the content ecosystem works and is quite successful and shows our ability to maintain a high-quality, highly-staked community while delivering a very impressive user growth.

From our work situation this year, we feel that Bilibili's MAU actually has a lot of room for improvement. Our Q3 actually achieved 25% of the same growth. Based on our 2022 work progress, we still see a lot of room for our MAU growth. Even in 3Q, we deliver 25% young year growth.

And if we carry on the current strategy, we believe we can still achieve the 400 million MAU target by next year.

While we pay attention to MAU growth, we also pay attention to DAU growth from this year, which is 2022. Because DAU versus MAU, it can better represent the quality and continuity of user growth.

Starting from 2022, we also put a lot of work in terms of the DAU growth because we do believe that DAU compared to MNU can present the quality of the user growth as well as the sustainability of the user growth. In addition, it also directly links to the commercial perspective of our community.

In my opinion, increasing the number of users is one of our goals. Increasing the number of users is one of our goals. Increasing the number of users is one of our goals. In fact, the final result of the growth of MAU is the growth of DAU. So, as you can see, this year we pay great attention Like I said, the growth is not the purpose. It's just a way to achieve our goal of increase the quality of our user. And in the end of the day,

growth over MAU will directly link to the growth of DAU. And that's why starting from this year, we are putting more emphasis and resources to increase our DAU. And if you look at our DAU to MAU ratio, it has already improved from 26% in 2021 to 27% in 2022. So this year, as everyone knows,

There should be a lot of changes and challenges in the macro environment. Therefore, we have also used narrowing and narrowing as a very important indicator in our work. In this situation, we will definitely pay more attention to the quality of user growth in terms of user growth. And then, relatively speaking, we turn our work into DAU. On the one hand, As you may all aware that we are facing multiple challenges from the macro environment and putting profitability at first is

one of the most important tasks for the management. The reason why we're putting more emphasis to DAU instead of MEU, we believe from one aspect, it can help us to increase the monetization efficiency, help us to grow our revenue, at the same time to reduce our self-marketing expenses and to achieve breaking even as soon as possible.

Our growth in DAU is definitely Very confident and then we think this growth will be more continuous and more beneficial to commercialization. And then when we do specific work, we will also pay more attention to a continuous improvement of that dm ratio. Next year, we will try to raise the ratio of dm ratio to 30%.

We are very confident to the DAU growth next year, and we believe this will be more sustainable for the whole company, as well as be very beneficial to our commercialization efforts. And as for the outlook for next year, we hope to increase our DAU to MAU ratio to 30%.

In terms of the market cost, we are better in controlling the shift of the work center. In fact, we have already begun to control the market cost in 2002. You can see that the market cost of Q3 dropped by 25% in the same ratio. Then, with the change in our work center, the overall market cost in 2023 will be a greater drop than in 2022.

Starting from 2022, we have already taken actions to control our sales and marketing expense. In Q3 this year, our sales and marketing expense already declined 25% year over year. As we're shifting our focus from MAU to DAU, we expect we can further reduce our sales and marketing expense, and the magnitude of the decline will be even bigger in 2023 compared to 2022. Operator, next question, please.

Thank you. Thank you. We'll now take our next question. Please stand by. This is from the line of Lee Tsang from Bank of America. Please go ahead.

Hi, management, good evening. Thank you for accepting my question. My question is mainly about cost-benefit. I saw that in the third quarter, the loss was relatively narrow. Can you share with us which cost-benefit and cost-benefit projects can be improved in the future? And how do we look at the long-term interest rate and profit rate trends? And then can you remind the management of our current profit-loss balance? Is there a change? Thank you for taking my question. My question is mainly on the profitability. Notice that our operating loss narrowed in the course. So how should we look at our growth margin and OP margin trend? And which cost items we see for the room to control? Also, any change to our breakeven target? Thank you.

We raised the target of reach break even by end of 2024.

and we'll stick to that mission and goal. And as we move through 2022, obviously there's been multiple challenges across the macro environment to reduce loss and putting profitability at first is the priority for the company. And this is something I personally look after and taking charge.

We have already taken actions to reduce our cost and expense.

And so far, the unit cost for our sovereign bandwidth continued to decline. And as I mentioned earlier, sales and marketing continued to decline year on year for three consecutive quarters.

Next, I will focus on a greater degree of market cost reduction. This is a process that will continue in the future, including the reduction of our company's internal management and research costs.

move forward will take more effort to reduce our social marketing expense as well as G&A and R&D expenses.

In terms of the efficiency improvement,

I intend to reduce investment on the non-core business and allocating and centralize our resources in areas that such as improving our commercialization efficiencies.

At the same time, we will optimize the organizational structure and reduce fat and gain weight. This part of the adjustment will be completed within this year. The effect will be seen in the first quarter of next year.

At the same time, we'll also take actions to optimize our organizational structure to reduce the fat and increase the lean. And we expect this adjustment will be completed by end of this year. And we'll start it to show on P&L starting from first quarter next year.

Yeah. I would take the question in regard to the gross margin and expense trend. Has the company taken on more actions to reduce cost and the prioritized probability. We expect our gross margin will gradually increase going forward. Sales marketing expense in 2022 has already declined year-over-year, as mentioned by our Chairman, and will continue to decline next year. And we expect R&D expenses, which will peak in Q4 this year, and start to decline next year. In 2023 and the future period, we expect overall operating expenses In absolute dollar terms, we are declining year-over-year, and net loss will further narrow down until we reach our break-even target. At the same time, we are paying very close attention to our cash flow and tightly control KPACs and investments as we narrow our losses. We aim to keep our cash balance at a healthy level.

Thank you. Operator, we can take the next question. Thank you.

Please stand by. Next question is from a line of Xiqing Zhang from CICC. Please go ahead.

Thank you. My question regards to advertising. Considering the impact of COVID-19 and the WIC micro environment, what's your strategy for advertising business? And how should we think about revenue growth in the first quarter and next year? In addition, during the 2011, we noticed that Bilibili has advertising products related to content e-commerce. could management share more details about it and also want to know is bdb considering launching pre-roll ads at the present thank you uh

Despite weakened macro environment,

The ad revenue in third quarter reached 1.35 billion and increased 16% year-over-year. We consider this is a job well done, and especially the ad revenue from performance-related formats increased by over 20% year-over-year, and we are continuing to take market share in the ad market.

In 2023, we will continue to enhance the ability to integrate marketing, and we will also strengthen the positive commercial atmosphere in the Bilibili community, helping more advertisers to reach Bilibili's young users at different times at different screens and different scenarios. This will make it more convenient for brand users to establish their new assets. This is what we will continue to do in 2023.

In 2023, we plan to continue to enhance our integrated marketing capability and to build a friendly and welcoming environment for advertisers. And we will continue to help advertisers to effectively reach our young generation through Bilibili's multiple products and multiple using scenarios. and help them to build their brand equity. And we intend to further combine our content ecosystem with our ad business, particularly in our leading verticals, increase our ad inventory, and accelerate ad momentum in the consumption and transaction scenarios.

For example, like games, 3C numbers, Bilibili is already in the top five in the market. For example, fast food, such as food and beverage, beauty and make-up are essential products for young people. In fact, the advertising revenue of Bilibili has also continued to grow. In the future, there are some more trendier categories. We see that cars, mothers and children, home appliances, etc. are growing in the Bilibili community with the growth of young people. We see a huge potential. The number of purchases in Q3 is also more than 80%.

For example, we are already among the top five market player in verticals like game and 3C and digital products. Another example would be for FMCG apps, which are part of young generation's necessity, continue to grow, such as food and beverage, skincare, and cosmetics. And as we move forward, we expect verticals like automotive, Baby and maternities and home decor and appliances will have great potentials, especially as the young generation continue to grow with Bilibili as they enter different life stages. And in Q3, actually, automotive sector grow over 80% young year within Bilibili.

Just now, you mentioned delivery, which is also a term that everyone in the industry likes to mention. In the Bilibili community ecosystem, I am more willing to define it and understand it as a form of consumption and transaction. Consumption and transaction is a more basic construction of the Bilibili community. Under the basic construction, it is the most important commercialized consumption scene of Bilibili. You mentioned about the content e-commerce.

I would rather define the content e-commerce in Bilibili ecosystem as a consumption and transaction scenario. First of all, it's an infrastructure for us. and it is also one of the very important scenarios for commercialization. In 2023, we plan to further connect the transaction scenario with Bilibili community and with advertising business.

We can continue to explore the commercial value of Bilibili in different scenarios of consumption and trading.

For example, in the past two quarters, together with Taobao, Tmall, Jingdong, Pinduoduo, and other brand advertisers, we're already starting to explore the seeding, consumption, and transaction model, including video and live broadcasting-based e-commerce, as well as traffic acquisition within the Bilibili community. With that, we hope to explore the different commercial values of Bilibili unique consumption and transaction scenario.

In the past, Bilibili's advertising revenue has increased by 47% on Double 11. The revenue of effective advertising has also increased by more than 80%. During this year's W11, despite the weakened macro environment,

we still recorded a 47% young year growth for our advertising revenue, among which the performance-based formats of advertising revenue grow over 80%. And in the future, we're looking to further expand and be very open about the transaction and consumption scenario. We will come more of the brand advertiser to join us to further explore the commercial value within our unique ecosystem.

刚才您也提到另外一个是贴片广告, 其实贴片广告已经是很传统的广告形态了, 市场在贴片的收入仅占3%到5%, 占比其实萎缩也很快, 单价也越来越低, 所以市场对于贴片广告的判断, 在B站能落地是过于乐观的, As for the pre-roll, which is an old-fashioned format of advertising,

actually only takes about 3% to 5% of the overall advertising market in China, and it's declining rapidly along with its unit price. We believe some people might have been overly optimistic about the pre-route potential within Bilibili. And most of the Bilibili content are about two to five minutes long. If we add pre-roll to all of them, it will only generate very limited income but be extremely disruptive to user experience. We believe it will bring more harm than good, which we will be very conscious to try out.

Here I can give some examples. For example, if we can achieve in B站, some innovative advertising forms within video players such as native ads, it would be a good attempt. Or, for example, we can use transformation components, including the combination of CPS, to achieve the new investment model of the game, such as our internal game partners. Yes, or the third one, or let's take an example of the new story. It is also a good advertising form of display. The increase of the subsequent story will become the growth point of advertising income improvement. Then, in fact, I will also find that including Bilibili's video shopping list, including live shopping list plus take-off model. In fact, it relies on the video promotion model plus our algorithm. Yeah, that's right. I'm watching the data. I know you can't talk to her. So you don't think you're going to want to go. So you don't think you're going to want to go. So you don't think you're going to want to go.

I'll give you some examples of how are we exploring the app formats that's more adaptive to Bilibili's ecosystem. For example, we can explore within the video player frame, such as native ads, bullet chat ads, and other innovative formats within the player frame. Or we can explore the model that combines performance-based ads with both app download conversion modules and CPS. We call it a game partner model. And another example would be the store mode ads, which we believe is a very good format to carry on the performance-based ads. And as the store mode traffic continues to grow, it will open more ad inventory to us. Lastly would be the content e-commerce. plus user acquisition within the visibility model will continue to refine and optimize our algo to improve those performance-based ad efficiency. All of above mentioned formats of advertising we believe will generate higher income as well as it's more sustainable to our overall community.

We're still very, very confident that our app business in 2023 will continue to outperform the overall industry and will continue to take on more market share. Thank you.

Operator, next question, please.

Thank you. We'll now take our next question.

Please stand by.

This is from the line of Lincoln Kong from Goldman Sachs. Please go ahead.

Thank you, Ms. Guan. I would like to ask about the game business. We also see that Weizhong has now taken over the game business. Looking at the game business strategy and goals, what changes will there be? Recently, the game version has also been re-released. What is the expected growth of the future company's overall game business, especially our self-produced games and the expansion of overseas games? Can you share with us the latest strategy and progress? So my question is about the gaming business. Given that, Mr. Cheng, you have personally taken control of the gaming business, what's our strategy and targets and change post your taking over? And after the resumption of the game bank, how is the company looking for our overall gaming business growth outlook, especially of our self-developed games as well as the overseas gaming strategy and progress. Thank you.

I remember in 2019, I mentioned that video and games are Bilibili's main business. The so-called main business is the core business of a company. We have been doing games for a long time. In fact, Bilibili's game business is a natural result because iRace

the strategy of putting video and game as Bilibili's core business back in 2019. As a matter of fact, Bilibili is starting to explore game business from very early days. Actually, Bilibili is the platform that has the most condensed and concentrated gamer in China. At the same time, we have lots of content offerings in terms of live broadcasting and video on our platform. At the same time, the areas that we invested in the original animation and comics has great synergies with our game business. So naturally, it's just a natural extension and natural course for Bilibili to put games at our core.

In the past two years, I think the development of our game business is not as good as I expected. The main reason is that I think we have taken some detours in terms of game words. I think in the past two years, our game words have been too open. That is, many teams are exploring in many directions at the same time. And then the result of this method is inevitably to be short-lived, greedy, but

In the past two years, the game business didn't perform as well as we planned, which I believe is mainly due to the slower than expected self-developed game progress. The reason is that we were exploring in multiple directions by multiple teams at once. but end up spreading too thin and only just too double of many, but didn't bear fruit.

I am personally responsible for the game industry. In fact, I will not make any changes to the strategy and goals of the game industry. On the contrary, I will further strengthen the previously proposed global release of self-proclaimed gold products. As I personally take on the game business, it doesn't mean we're making any change to our original strategy. As a matter of fact,

we will carry on more diligently to that strategy, which is to develop high-quality game in-house and distribute globally, and putting game business at our core.

I will only focus on one or two directions in terms of game words. Concentrate our energy and resources on doing the least, but do it in the best direction for the industry.

I intend to focus on only one or two directions, focusing our best resource and our energy on doing the least but the best towards the highest industry standard. At the same time, I will strengthen the lifecycle management of our self-development projects to increase the investment in projects that meet the expectations and quickly iterate out projects that do not meet the expectations.

Next, my request for some businesses is to do good products and businesses. And I also believe that because of the soil of the Bilibili platform, in the future, No matter if it's game voice acting or game development, we can achieve continuous growth.

Moving forward, my requirement for the game business will be to be very, very down to earth and do our best to produce the best product. and try our best to enhance the business. Because we have the perfect environment in game content, I'm still very confident, whether it's self-developed games or licensing games, we can deliver sustainable growth in this sector.

Operator, next question, please. Thank you. Thank you.

We'll now take our next question.

Please stand by. This is from the line of Yuan Zhang from China Renaissance. Please go ahead.

So my question regarding live broadcasting, so the integration between the live broadcasting and the video streaming has been on for a while. Can you share more about the strategy and discuss our expectation about live streaming business? Thank you.

We think the live broadcasting business has met our expectations this year. The first three quarters this year are

live broadcasting revenue grow by 30% year-on-year, and our live broadcasting's gross margin also starting to recover this year.

I've always said that live streaming is an ability that must occupy the platform. It is a natural extension that must occupy the content ecosystem. In fact, this sentence also represents the idea that we do live streaming, which is the most likely

As I mentioned in the past, we have always believed live broadcasting is a capability for the platform. It's a natural extension of the video format of content, and our strategy has always been combine the live broadcasting ecosystem with our video ecosystem to generate best energies among these two?

Yes, in our specific work, we will dig up a overlap between the two sides. That is to make the host become the host, to make the host become the host. And then the data we see in Q3 is that both the host and the host From the supply of content side, we have continuously explored within our ecosystem to convert our content creators to host and convert our host to content creators.

content creator slash host, the number of those content creators slash host has increased 73% year over year, which is a quite impressive growth. And this demonstrates how our strategy is working and we are increasing the supply side of the content.

At the same time, we also pay attention to the refining of the consumer side. We are also exploring from the demand side to

to discover the users that they might be both interested in the same vertical of content, whether it's in the format of video or it's in the format of live broadcasting. And in the third quarter, we've seen the DAU penetration of the live broadcasting continue to increase, and the NPU for live broadcasting also recorded a 79% year-on-year growth This is also very, very impressive growth. Last quarter, we have combined the operation of live broadcasting with the PUGB. And from an organizational perspective, it's the same team that's looking over the content creators operation as well as the live broadcasting host operation. And it's also the same team that's paying attention to which user is watching certain content category and what kind of live broadcasting content he or she might be interested in. We believe this change are really lining up and aligning our goals of our operation target at the same time to increase our overall operational efficiency.

And the integration of this organizational structure also brings an advantage, that is, for the same content category, after the operation of video and live broadcast is integrated into a team, then you will find that they can discover many new ways of operation. For example, this category of our virtual anchor, then it uses the virtual broadcast and video database

And we're combining the operation for the same vertical in terms of live broadcasting and PUGB. And for example, in terms of the VUP content categories, now we are opening up the video materials or Video inventory to both VTubers as well as the virtual content creators. This has significantly increased the live broadcasting host's frequency of opening up their live broadcasting program and increased our overall content supply.

For example, in the past, we thought that knowledge was not enough. is not suitable for live streaming, but later found that our organizational structure has been integrated and found that it is not the case. For example, we are in the legal category of knowledge of the app, or in the emotional category of some of the knowledge area of the app, it can live stream and this user link to answer the question, and then the effect of this answer is very good. We therefore also Another example would be the knowledge sector. In the past, we might think that for the knowledge sector content creators it's difficult for them to monetize through live broadcasting. However, we've discussed in the law area or in the

relationship areas, it's very suitable for the live broadcasting host to connect directly with the participants and do a Q&A session. And actually, we have seen one live broadcasting host to gain her one million follower milestone just through the live broadcasting services. So this will be another example after the institution of the two operations, we can explore new opportunities.

As such, I'm very confident

As the integration further penetrates within the live broadcast NPUGV, the live broadcasting revenue as well as its gross margin will continue to increase in 2023. Back to you, operator. I think that's about time for the Q&A session today.

Thank you. That does conclude the question and answer session. So I would like to turn the conference back over to Juliette Yang for any additional closing remarks.

Well, thank you once again for joining us today. If you have further questions, please contact me, Juliette Yang, Bilibili Executive IR Director, or TBG Ambassador Relations. Our contact information for IR in both China and the US can be found on today's press release. Have a great day. Bye-bye.

Thank you. This does conclude the conference for today. Thank you for participating and you may now disconnect.

The conference will begin shortly. To raise your hand during Q&A, you can dial star 11. you Thank you. Thank you.

Thank you.

Good day and welcome to the Bilibili third quarter 2022 financial results and business update conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Juliette Yang, Executive Director of Investor Relations. Please go ahead.

Thank you, Operator. During this call, we'll discuss 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-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 a webcast replay of this conference call will be available on the Billabilly IR website at ir.billabilly.com. Joining us today from Bilibili Center 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 third quarter 2022 results conference call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. Our community, which is the foundation of our business and key to our long-term success, continues to expand. In the third quarter, DAUs reached more than 90 million and MAUs nearly 333 million. both up 25% year-over-year. Average daily time spent per user was 96 minutes in the third quarter, up 8 minutes from the same period last year. With that, the total time spent on Bilibili grew by 37% year-over-year. Having said that, we still face micro headwinds and uncertainties that run over the industry. To cope with the challenging environment, we have reprioritized our goals and promoted to focus on two key tactics that will help us turn the corner. First, our users. As our MAUs have reached a sizable base of nearly 333 million, we think it is time to shift our primary focus to DAU growth. DAUs not only represent the quality and the sustainability of our community, but also directly linked to our influential power as a platform, as well as various commercial prospects, particularly in terms of revenue generation from our tithing and vast business. With our improving product offerings and the refined algorithms, we can continue to grow our DAU base and improve our DAU to MAU ratio with reduced sales and marketing spend. Second, we are committed to improving our financials by expanding our growth margin and narrowing our losses. After a challenging first half of the year, revenues in the third quarter grew to RMB 5.8 billion, up 18% quarter-over-quarter and 11% year-over-year. In the third quarter, we continued to take various actions to tighten our spending. Growth margin improved to 18% up 3% points sequentially. Sales and marketing expenses as a percentage of total revenues were 21%, down 3% points sequentially. Our non-gamma loss ratio also narrowed by 10% points compared with the prior quarter.

Looking ahead,

we will implement a number of additional cost control measures and further rationalize our marketing expenses at headcount planning. Specifically, we are streamline our investment in R&D at cutting down on projects with lower chance of success and being extra mindful when exploring new opportunities. At the same time, we are centralizing our resources in areas related to improving commercialization efficiency and user experience. These adjustments will be completed by the end of this year. Accordingly, we expect our sales, marketing, and R&D expenses to peak this year and start to decline in 2023, with net loss narrowing further accordingly. With that, I'd like to provide a brief update on our core pillars of content, community, and commercialization. Starting with content. Over the years, as young generations on Bilibili grow up and enter new stages of life, their interests evolve, driving creators' passions as well as the expansion of our content categories. So on top of our traditional strong content verticals, we have seen emerging categories such as automobile, home decoration, and internal design, and baby and maternity. In the third quarter, 3.8 million monthly active content creators on Bilibili readily accommodated these varied needs, creating near 16 million new videos on a monthly basis of 40% and 54% year-over-year, respectively. The expanding content library drives the overall traffic growth on our platform. Total video views grow by 64% year-over-year, driven by both PUGV and story mode content, which grow by 34% and over 470% year-over-year, respectively. Particularly, with improving content distribution capabilities of story mode, content creators can build their fan base more easily. sharing their content with other kindred spreads on Bilibili. The various monetization passes we have cultivated for content creators continue to offer more creators more opportunities to make money while doing things they love. In the third quarter, over 1.2 million content creators earned income through multiple channels on Bilibili, up 74% year-over-year. looking at our community. We consistently deepen our user engagement in our community with our featured and diverse content. As I mentioned earlier, the average daily user time spent reached a record high of 96 minutes, up 8 minutes from the same period last year. Our monthly interactions also increased 41% year-over-year to 14.4 billion. Furthermore, the number of official members on our site was up by 37% year-over-year to 183 million, maintaining a stable 12-month retention rate above 80%. Now, let's look at our commercialization and the prospects for near and long-term monetization. First, our vast business. Our vast revenues were the RMB 2.2 billion, up 16% year-over-year in the third quarter. By further integrating live broadcasting with our POGV ecosystem, we maintain our unique platform advantage. We had 67% more live broadcasting hosts in the third quarter this year than for the same period last year. The number of live broadcasting paying users increased by 79% year-over-year in the third quarter. The number of premium memberships for the third quarter grew 12% year-over-year to 28.4 million. In December, we plan to launch our self-produced Chinese anime title, The Three-Body Problems. This highly anticipated title is expected to attract a wide range of sci-fi lovers to our platform. Looking at our advertising, despite softness in microenvironment, Net revenues were RMB 1.4 billion, an increase of 16% year-over-year. We further strengthened our integrated marketing campaign offerings by combining diverse ad products and conversion modules across different video viewing scenarios. Story mode ads, as part of ad offerings, continue to capture more performance-based ad dollars in the third quarter. Our top advertising verticals in the third quarter were games, digital products and home appearance lines, skincare and cosmetics, automotive, and food and privilege. And for games, our game revenues grow 6% year-over-year to RMB 1.5 billion, largely driven by the new titles we launched in the domestic and overseas market in the third quarter. Developing house distributed globally remains our core game strategy, which has started to bear fruit. Revenue generated from self-development games contributes 9% of our total game revenue in the third quarter. Looking at our pipelines, we have two games approved for domestic release this year and earlier next year, including one self-development title. Five titles are slated to launch in the overseas markets early next year. Facing the market's micro-uncertainties, our primary goal is clear, improving our gross profit margin and narrowing our net loss. By expediting our commercialization, we believe our top line can catch up with our community's scale. While we remain committed to our goal of reaching non-GAAP operating breakeven by 2024, we will also actively manage our cash position and liabilities. We believe we can weather through the micro-incentives and emerge as a stronger, more efficient, and more resilient company. This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the third quarter of 2022 and outlook for the fourth quarter of 2022. Total net revenues for the third quarter were RMB 5.8 billion, up 11% from the same period of 2021. Our total net revenue breakdown by revenue stream was approximately 25% mobile games, 38% VAS, 23% advertising, and 14% from the e-commerce and other business. Cost of revenues increased by 13% year-over-year to RMB 4.7 billion. Our gross profit in the third quarter was RMB 1.1 billion, and our gross margin was 18.2%. Gross margin recovered by 3.2% points sequentially attributable to the top-line growth. we expect to show continuous sequential quarterly improvements in the first quarter and the coming year. Total operating expenses was RMB 2.9 billion. Fractious compared with the same period of 2021. We cut sales marketing expenses by 25% year-over-year to RMB 1.2 billion. Sales marketing expenses as a percentage of total revenues was also down to 21%. compared with the 31% in the same period last year. G&A expenses was RMB 543.4 million, a 14% year-over-year. The increase was mainly primarily due to increased headcount in G&A personnel and higher rental expenses. R&D expenses was RMB 1.1 billion, representing a 43% increase year-over-year. The increase was primarily due to increased HICOM in R&D and increased share-based compensation expenses. Net loss and adjusted net loss was RMB 1.7 billion and RMB 1.8 billion for the third quarter of 2022, respectively. We successfully narrowed our adjusted net loss ratio by 10% points sequentially in Q3, and we expect the narrowing trend will continue in the fourth quarter and the coming years. Turning to our capital allocation and the liability management, we currently have three outstanding convertible bonds totaling $2.5 billion among which the put rise of $746 million is accessible in June 2023, $429 million is accessible in April 2024, and $1.3 billion is accessible in December 2024. As of September 13, 2022, we had cash and cash equivalents, time deposits, and short-term investments of RMB $23.9 billion or $3.4 billion. And we believe this level of liquidity is sufficient to repay the aggregate balance of all outstanding convertible bonds by their respective maturity, without considering any external funding resources available to us. Meanwhile, we are taking further actions to narrow our losses and reaching breakeven. We will be prudent with our CAPEX and will closely monitor our cash outflow. At the same time, these convertible bonds are currently traded at discounted price, and we will continue to evaluate the option to repurchase and retail them at a reasonable price. As of October 31, 2022, we had repurchased and retailed a total principal amount of $329 million of these notes for a total cash consideration of $247 million, generating $82 million net cash position. We will stay opportunistic when continuously evaluating options for the best use of our capital. Finally, our conversion from a secondary to a primary listing on the Hong Kong Stock Exchange became effective on October 3, 2022. Bilibili is now a dual primary listed company in Hong Kong and the United States. This conversation will further expand our investor base and provide more liquidity for our securities in the capital markets. With that in mind, we are currently projecting net revenues for the fourth quarter of 2022 to be between RMB 6.0 billion and RMB 6.2 billion. Thank you for your attention. We would now like to open the call to questions. Operator, please go ahead.

Thank you. As a reminder, if you would like to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. That's star 1 1 if you would like to ask a question. For the benefit of all participants on today's call, if you wish to ask your question to 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. Thank you. We'll now take our first question. Please stand by. Your first question is from the line of Daniel Chen from JP Morgan. Please go ahead.

I will translate myself. uh so in the previous prepared remark management mentioned that the user growth focus will switch into a daily active user dau so could you maybe elaborate more about our future user growth strategy thank you um

MAU is at 1.1 billion. So, we have always used MAU as a indicator for our users. In the past three years, we have increased from 1.1 billion to 3.3 billion.

We raised the centered around MAU strategy back in 2019. And in the past, we have successfully expanded our MAU from 110 million to nowadays 330 million. And this is quite successful and showed our excellent execution in the past few years.

Well, if we're able to grow three times in the past few years, which supported the thesis that the Bilibili's business model, which is the

community plus the content ecosystem works and is quite successful and shows our ability to maintain a high-quality, highly-staked community while delivering a very impressive user growth.

From our work situation this year, we feel that Bilibili's MAU actually has a lot of room for improvement. Our Q3 actually achieved 25% of the same growth. Based on our 2022 work progress, we still see a lot of room for our MAU growth. Even in 3Q, we deliver 25% year-on-year growth.

And if we carry on the current strategy, we believe we can still achieve the 400 million MAU target by next year.

While we pay attention to MAU growth, we also pay attention to DAU growth from this year, that is, from 2022. Because DAU compared to MAU, it can represent the quality and continuity of user growth.

Starting from 2022, we also put a lot of work in terms of the DAU growth because we do believe that DAU compared to MMU can present the quality of the user growth as well as the sustainability of the user growth. In addition, it also directly links to the commercial perspective of our community.

In my opinion, increasing the number of users is one of our goals. Increasing the number of users is one of our methods. Increasing the number of users is one of our goals. In fact, the final result of the growth of MAU is the growth of DAU. So, as you can see, this year we pay great attention like i said um the growth is not the purpose it's just a way to achieve our goal of increase the quality of our user and in the end of the day the

growth over MAU will directly link to the growth of DAU. And that's why, starting from this year, we are putting more emphasize and resources to increase our DAU. And if you look at our DAU to MAU ratio, it has already improved from 26% in 2021 to 27% in 2022. So this year, as everyone knows,

In terms of the environment, there should be a lot of changes and challenges. Therefore, we have also used the narrowing and narrowing as a very, very important indicator in our work. In this situation, in terms of user growth, we will definitely pay more attention to the quality of user growth. And then, relatively speaking, we turn our work into DAU. On the one hand, As you may all aware that we are facing multiple challenges from the macro environment and putting profitability at first is

one of the most important tasks for the management. The reason why we're putting more emphasis to DAU instead of the MEU, we believe from one aspect, it can help us to increase the monetization efficiency, help us to grow our revenue, at the same time to reduce our self-marketing expenses and to achieve breaking even as soon as possible.

Our growth in DAU is definitely Very confident and we think this growth will be more continuous and more beneficial to commercialization. Then when we do specific work, we will also pay more attention to the continuous improvement of the dm ratio. Next year, we will try to increase the dm ratio ratio to 30%.

We are very confident to the DAU growth next year, and we believe this will be more sustainable for the whole company, as well as be very beneficial to our commercialization efforts. And as for the outlook for next year, we hope to increase our DAU to MAU ratio to 30%.

The transition of the work center, we will also control the market cost better. In fact, we have started to control the market cost since 2002. You can see that the market cost of Q3 has dropped by 25%. Then, with the change of our work center, next year, that is, in 2023, the overall market cost will be a greater drop than in 2022.

Starting from 2022, we have already taken actions to control our sales and marketing expense. In Q3 this year, our sales and marketing expense already declined 25% year over year. As we're shifting our focus from MAU to DAU, we expect we can further reduce our sales and marketing expense, and the magnitude of the decline will be even bigger in 2023 compared to 2022.

Operator, next question, please. Thank you. Thank you. We'll now take our next question. Please stand by. This is from the line of Lei Zhang from Bank of America. Please go ahead.

Hi, 管理層,晚上好,謝謝接受我的提問。 我的問題主要是關於成本費用的。 有看到我們三季度其實虧損有比較明顯的收窄。 可以分享一下Driver還有未來有哪些成本和費用的項目可以有更大的空間改善呢? 然後可以請管理層remember一下我們現在的這個盈虧平衡的一個目標是不是有發生變化嗎? Thank you for taking my question. My question is mainly on the profitability. Notice that our operating loss narrowed in the course. So how should we look at our growth margin and OP margin trend? And which cost items we see for the room to control? Also, any change to our breakeven target? Thank you.

We raised the target of reach break even by end of 2024.

and we'll stick to that mission and goal. And as we move through 2022, obviously there's been multiple challenges across the micro environment to reduce loss and putting profitability at first is the priority for the company. And this is something I personally look after and taking charge.

We have already taken actions to reduce our costs and expenses.

And so far, the unit cost for our sovereign bandwidth continues to decline. And as I mentioned earlier, SaaS and marketing continue to decline year-on-year for three consecutive quarters.

Next, I will focus on a greater reduction in market costs. This is a process that will continue in the future, including the reduction in management and research costs within our company.

move forward will take more effort to reduce our sales and marketing expense as well as G&A and R&D expenses.

In terms of the efficiency improvement,

I intend to reduce investment on the non-core business and allocating and centralize our resources in areas such as improving our commercialization efficiencies. 同时我们会优化组织结构,去肥增瘦,这部分的调整在今年内会完成,效果会在明年的第一季度大家就能看到。 At the same time, we'll also take actions to optimize our organizational structure to reduce the fat and increase the lean. And we expect this adjustment will be completed by end of this year. And we'll start it to show on P&L starting from first quarter next year.

Yeah. I would take the question in regard to the growth margin and expense trend. Has the company taken on more actions to reduce cost and the prioritized probability. We expect our gross margin will gradually increase going forward. Sales marketing expense in 2022 has already declined over the year, as mentioned by our chairman, and will continue to decline next year. And we expect R&D expenses, which will peak in Q4 this year, and start to decline next year. In 2023 and the future period, we expect overall operating expenses In absolute dollar terms, we are declining year-over-year, and then loss will further narrow down until we reach our break-even target. At the same time, we are paying very close attention to our cash flow and tightly control KPACs and investments as we narrow our losses. We aim to keep our cash balance at a healthy level.

Thank you, operator. We can take the next question. Thank you.

Please stand by. Next question is from a line of Xiqing Zhang from CICC. Please go ahead.

Thank you. My question regards to advertising. Considering the impact of COVID-19 and the WIC micro environment, what's your strategy for advertising business? And how should we think about revenue growth in the first quarter and the next year? In addition, during the 2011, we noticed that Bilibili has advertising products related to content e-commerce. Can management share more details about it? And also want to know, is B2B considering launching pre-roll ads at the present?

Thank you. 今年在这个环境还是比较复杂,也充满挑战的,包括这个经济的宏观条件,疫情等等,大家都清楚。

In the third quarter, Bilibili's advertising revenue reached $13.5 billion, which is still 16% of the total growth, which is still a relatively good growth in the entire environment. The growth of the advertising model also exceeded 50%. At the same time, we also saw that the market share rate on advertising revenue continued to increase.

The ad revenue in third quarter reached $1.35 billion and increased 16% year-over-year. We consider this is a job well done, and especially the ad revenue from performance-related formats increased by over 20% year-over-year, and we are continuing to take market share in the ad market.

In 2023, we will continue to improve the ability to integrate marketing, and we will also strengthen the positive commercial atmosphere in the Bilibili community, helping more advertisers to reach Bilibili's young users at different times at different screens and different scenarios. This will make it more convenient for brand users to establish their new assets. This is what we will continue to enhance in 2023.

In 2023, we plan to continue to enhance our integrated marketing capability and to build a friendly and welcoming environment for advertisers. And we will continue to help advertisers to effectively reach our young generation through Bilibili's multiple products and multiple using scenarios. and help them to build their brand equity. And we intend to further combine our content ecosystem with our ad business, particularly in our leading verticals, increase our ad inventory, and accelerate ad momentum in the consumption and transaction scenarios.

For example, like games, 3C numbers, Bilibili is already in the top five in the market. For example, fast food, such as food and beverage, beauty and make-up are essential products for young people. In fact, the advertising revenue of Bilibili has also continued to grow. In the future, there are some more trendier products. We see that cars, mothers and children, home appliances, etc. are growing in the Bilibili community with young people. We see huge potential. The number of cars in Q3 is also more than 80%.

For example, we are already among the top five market player in verticals like game and 3C and digital products. Another example would be for FMCG apps, which are part of young generation's necessity, continue to grow, such as food and beverage, skincare, and cosmetics. And as we move forward, we expect verticals like automotive, Baby and maternities and home decor and appliances will have great potentials, especially as the young generation continue to grow with Bilibili as they enter different life stages. And in Q3, actually, the automotive sector grew over 80% young year within Bilibili.

Just now, you mentioned delivery, which is also a term that everyone in the industry likes to mention. In the Bilibili community ecosystem, I would prefer to define it and understand it as a form of consumption and transaction. Consumption and transaction is a more basic construction of the Bilibili community. Under the basic construction, it is the most important commercialized consumption scene of Bilibili. You mentioned about the content e-commerce.

I would rather define the content e-commerce in Bilibili ecosystem as a consumption and transaction scenario. First of all, it's an infrastructure for us. and it is also one of the very important scenarios for commercialization. In 2023, we plan to further connect the transaction scenario with the Bilibili community and with advertising business.

For example, in the last two queues, we have been working with Taobao Tianmao, Jindong, Pinduoduo, and the brand advertisers, and we have also tried to carry out heavy market consumption in Bilibili. We can continue to explore the commercial value of Bilibili in different scenarios of consumption and trading.

For example, in the past two quarters, together with Taobao, Tmall, Jingdong, Pinduoduo, and other brand advertisers, we're already starting to explore the seeding, consumption, and transaction model, including video and live broadcasting-based e-commerce, as well as traffic acquisition within the Bilibili community. With that, we hope to explore the different commercial values of Bilibili unique consumption and transaction scenario.

On the day of Double 11, Bilibili's advertising revenue increased by 47% on the day of the event. The revenue of the effect-type advertising increased by more than 80%. During this year's Double 11, despite the weakened macro environment,

We still recorded a 47% young year growth for our advertising revenue, among which the performance-based formats of advertising revenue grow over 80%. And in the future, we're looking to further expand and be very open about the transaction and consumption scenario. more of the brand advertiser to join us to further explore the commercial value within our unique ecosystem.

刚才您也提到另外一个是贴片广告, 其实贴片广告已经是很传统的广告形态了, 市场在贴片的收入仅占3%到5%, 占比其实萎缩也很快,单价也越来越低, 所以市场对于贴片广告的判断, 在B站能落地是过于乐观的, B站的内容大多还是集中在两到五分钟,所有的内容如果都采取贴片这种形式,收入其实还是会比较少,但是又会极其破坏用户体验,所以得不偿失的一种传统的广告形态跟模式,基于B站是不会轻易去尝试的。 As for the pre-roll, which is an old-fashioned format of

advertising actually only takes about three to five percent of the overall advertising market in China, and it's declining rapidly along with its unit price. We believe some people might have been overly optimistic about the pre-route potential within Bilibili. And most of the Bilibili content are about two to five minutes long. If we add payroll to all of them, it will only generate very limited income but be extremely disruptive to user experience. We believe it will bring more harm than good, which we will be very conscious to try out.

Here, I can give some examples. For example, if we can make some innovative advertising models within the video player, such as native ads, on Bilibili, it would be a great attempt. Or, for example, we can use conversion components, including the combination of CPS, to make a new investment model for the game, such as our internal game partners. Yes, or the third one, or let's take the example of the new story. It is also a very good advertising model. The subsequent story increase will become the growth point of advertising revenue improvement. In the end, in fact, I will also find that, including the video shopping list seen by Bilibili, including the live shopping list plus the model of take-off, in fact, it relies on The promotion model of the video plus our algorithmic algorithmic model of the reception ability can be strengthened, then this will also have a relatively large growth in our advertising revenue. I said that the above just mentioned some examples that we have already conducted or will actively try. Will be more able to get advertising revenue than Tietian and this growth will continue and very healthy.

I'll give you some examples of how are we exploring the app formats that's more adaptive to Bilibili's ecosystem. For example, we can explore within the video player frame, such as native ads, bullet chat ads, and other innovative formats within the player frame. Or we can explore the model that combines performance-based ads with both app download conversion modules and CPS. We call it a game partner model. And another example would be the store mode ads, which we believe is a very good format to carry on the performance-based ads. And as the store mode traffic continues to grow, it will open more ad inventory to us. Lastly, it would be the content e-commerce plus user acquisition within the visibility model. We'll continue to refine and optimize our algo to improve those performance-based ad efficiency. All of above mentioned formats of advertising we believe will generate higher income as well as it's more sustainable to our overall community.

We're still very, very confident that our app business in 2023 will continue to outperform the overall industry and will continue to take on more market share. Thank you.

Operator, next question, please.

Thank you. We'll now take our next question.

Please stand by.

This is from the line of Lincoln Kong from Goldman Sachs. Please go ahead.

Hello, thank you, Ms. Guan. I would like to ask about the game business. We also see that Weizhong is now accepting the game industry. So, after this, let's look at the game industry's strategies and goals. Will there be any changes? So, recently, the game version has also been re-released. What is the expected growth of the future company's overall game industry, especially our self-produced games and the expansion of overseas games? Can you share with us the latest strategies and progress? So my question is about the gaming business. Given that, Mr. Cheng, you have personally taken control of the gaming business, what's our strategy and targets and change post your takeover? And after the resumption of the game bank, how is the company looking for our overall gaming business growth outlook, especially of our self-developed games as well as the overseas gaming strategy and progress. Thank you.

I remember in 2019, I mentioned that video games and games are Bilibili's main business. The so-called main business is the core business of a company. We have been doing games for a long time. In fact, Bilibili's game business is a natural result because iRace

the strategy of putting video and game as Bilibili's core business back in 2019. As a matter of fact, Bilibili is starting to explore game business from very early days. Actually, Bilibili is the platform that has the most condensed and concentrated gamer in China. At the same time, we have lots of content offerings in terms of live broadcasting and video on our platform. At the same time, the areas that we invested in the original animation and comics has great synergies with our game business. So naturally, it's just a natural extension and natural course for Bilibili to put games at our core.

In the past two years, I think the development of our game business is not as good as I expected. The main reason is that I think we have taken some detours in terms of game words. I think in the past two years, our game words have been too open. That is, many teams are exploring in many directions at the same time. And then the result of this method is necessarily a long way to go.

In the past two years, the game business didn't perform as well as we planned, which I believe is mainly due to the slower than expected self-developed game progress. The reason is that we were exploring in multiple directions by multiple teams at once. but end up spreading too thin and only just too double of many, but didn't bear fruit.

I am personally responsible for the game industry. In fact, I will not make any changes to the strategy and goals of the game industry. On the contrary, I will further strengthen the previously proposed global release of self-produced products. As I personally take on the game business, it doesn't mean we're making any change to our original strategy. As a matter of fact,

we will carry on more diligently to that strategy, which is to develop high-quality game in-house and distribute globally, and putting game business at our core.

I will only focus on one or two directions in terms of game development. Concentrate our energy and resources on doing the least, but do it in the best way for the industry.

I intend to focus on only one or two directions, focusing our best resource and our energy on doing the least but the best towards the highest industry standard. At the same time, I will strengthen the lifecycle management of our self-development projects to increase the investment in projects that meet the expectations and quickly iterate out projects that do not meet the expectations.

Next, my request for some businesses is to do good products and businesses. And I also believe that because of the soil of the Bilibili platform, in the future,

Moving forward, my requirement for the game business will be to be very, very down to earth and do our best to produce the best product. and try our best to enhance the business. Because we have the perfect environment in game content, I'm still very confident, whether it's self-developed games or licensing games, we can deliver sustainable growth in this sector.

Operator, next question, please. Thank you.

Thank you. We'll now take our next question.

Please stand by. This is from the line of Yuan Zhang from China Renaissance. Please go ahead.

So my question regarding live broadcasting, so the integration between the live broadcasting and the video streaming has been on for a while. Can you share more about the strategy and discuss our expectation about live streaming business? Thank you.

We think the live broadcasting business has met our expectations this year. The first three quarters this year are

live broadcasting revenue grow by 30% year-on-year, and our live broadcasting's gross margin also starting to recover this year.

I've always said that live streaming is an ability to occupy the platform. It is a natural extension of occupying the content ecosystem. In fact, this sentence also represents our thinking about live streaming, which is the most likely

As I mentioned in the past, we have always believed live broadcasting is a capability for the platform. It's a natural extension of the video format of content, and our strategy has always been combine the live broadcasting ecosystem with our video ecosystem to generate best synergies among these two.

Yes, in our specific work, we will dig up a overlap of supply and demand. That is to make the up host become the host, to make the host become the up host. Then what we see in Q3 is that both the up host and the host From the supply of content side, we have continuously explored within our ecosystem to convert our content creators to host and convert our host to content creators.

content creators slash hosts, the number of those content creators slash hosts has increased 73% year over year, which is a quite impressive growth. And this demonstrates how our strategy is working and we are increasing the supply side of the content.

At the same time, we also pay attention to the refinement of the consumer side. We are also exploring from the demand side to

to discover the users that they might be both interested in the same vertical of content, whether it's in the format of video or it's in the format of live broadcasting. And in the third quarter, we've seen the DAU penetration of the live broadcasting continue to increase, and the NPU for live broadcasting also recorded a 79% year-on-year growth This is also very, very impressive growth.

In the last quarter, we integrated video and live broadcast operations into the same department in the organization structure of the company. This department continues to operate both the up-to-date and live broadcast operations. It is concerned with both the users who watch the video and the users who consume it in the live broadcast.

Last quarter, we have combined the operation of live broadcasting with the PUGB. And from an organizational perspective, it's the same team that's looking over the content creators operation as well as the live broadcasting host operation. And it's also the same team that's paying attention to which user is watching certain content category and what kind of live broadcasting content he or she might be interested in. We believe this change are really lining up and aligning our goals of our operation target at the same time to increase our overall organization efficiency.

And the integration of this organizational structure also brings an advantage, that is, for the same content category, after the operation of video and live broadcast is integrated into a team, then you will find that they can find many new ways of operation. For example, this category of our virtual anchor, then it uses the virtual broadcast and video database

And we're combining of the operation for the same vertical in terms of live broadcasting and PUGB. And for example, in terms of the Vup content categories, now we are opening up the video materials or video inventory to both VTubers as well as the virtual content creators. This has significantly increased the live broadcasting host's frequency of opening up their live broadcasting program and increased our overall content supply.

For example, in the past, we thought that knowledge was not enough. is not suitable for live streaming, but later we found that after we integrated our organizational structure, we found that it was not the case. For example, we are in the legal category of knowledge, this is not the case, or in the emotional category of some knowledge, it is not the case, it can live stream and this user link to answer the question, and then the effect of this answer is very good, so we still Another example would be the knowledge sector. In the past, we might think that for the knowledge sector content creators, it's difficult for them to monetize through live broadcasting. However, we've discussed in the law area or in the

relationship areas, it's very suitable for the live broadcasting host to connect directly with the participants and do a Q&A session. And actually, we have seen one live broadcasting host to gain her one million follower milestone just through the live broadcasting services. So this will be another example after the execution of the two operations, we can explore new opportunities.

As such, I'm very confident

As the integration further penetrates within the live broadcast NPUGV, the live broadcasting revenue, as well as its gross margin, will continue to increase in 2023. Back to you, operator. I think that's about time for the Q&A session today.

Thank you. That does conclude the question and answer session. So I would like to turn the conference back over to Juliet Yang for any additional or closing remarks.

Well, thank you once again for joining us today. If you have further questions, please contact me, Juliet Yang, Billability Executive IR Director, or TPG Ambassador Relations. Our contact information for IR in both China and the US can be found on today's press release. Have a great day. Bye-bye.

thank you this does conclude the conference for today thank you for participating and you may now disconnect