Bilibili Inc.

Good day and welcome to Bilibili Second Quarter 2023 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 Young, 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. 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 2023 second quarter conference call to discuss our financial and operating results. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. We set our sights on prioritizing profitability and DAU growth, and we have made solid steps toward these goals. In the second quarter, we meaningfully improved our gross profit and narrowed our losses, While continuing to deliver healthy DAU growth and strong community metrics, I will share more color on both fronts. First of all, on our path to profitability, in the second quarter, we further improved our commercialization efficiency, enabling us to convert our growing traffic to quality top-line growth. The momentum we see in our advertising and live broadcasting business is encouraging. In the second quarter, our ad revenues increased by 36% and live broadcasting revenues increased by 32% both year-over-year. Moreover, our gross profit increased significantly by 66% year-over-year. driving our gross profit margin to 23%, marking the fourth consecutive quarter of improvement. Meanwhile, we have continued to strengthen our expense controls. Our total operating expenses declined by 14%, including a 22% decrease in sales and marketing expenses, a 14% decrease in G&A expenses, and a 7% decrease in R&D expenses, all on a year-over-year basis. These margin enhancements and our effective cost management contributed to our bottom-line improvement. We meaningfully reduced our non-GAAP net loss by 51% year-over-year. Moving on to our community growth, our DAUs increased by 15% year-over-year to 96.5 million in the second quarter, driving our DAU-to-MAU ratio up to 29.8%. Meanwhile, the users' average daily time spent on our platform reached 94 minutes in the second quarter, driving total time spent up by 22% year-on-year. We are pleased to see this strong DAU growth has continued in Q3. As we move into the second half of this year, our main tasks will be in three core areas. First, we aim to further enhance our traffic commercialization efficiency by increasing our ad revenues and live broadcasting revenues. Additionally, we will bring more high-quality games to our users, including the highly anticipated game Pretty Derby. Secondly, we will continue to take a prudent financial approach with strict control of our costs and expenses, and further narrow our losses. Finally, yet importantly, we are committed to achieving ongoing DAO growth and fostering an inspiring video community for young generations in China. With that overview of our progress, I'd now like to provide a brief update on our three core pillars of content, community, and commercialization, starting with content. Content creators continue to be our ecosystem's most valuable asset. Supporting these talented content creators in their ability to amass large followings and to be able to earn more money are among our top tasks. As always, we continue to optimize our algorithms and products to facilitate high-quality content and enable creators to be recognized. In the second quarter, the number of daily active content creators on our platform and our monthly content submissions increased by 19% and 43% year-over-year, respectively. In the second half of this year, we plan to shift our video watching metric from video views to video time spent which will help our users discover more high-quality content on Bilibili. We are also beta testing an AI-powered search feature in our community that enables relevant videos to be found more easily. Creator monetization on Bilibili increased as well in the second quarter. Over 1.58 million creators earned money through various Bilibili channels. showing a 40% increase year-over-year. In addition to our cash incentive program, more creators are earning income through advertising and live broadcasting channels. For example, our video commerce ads have opened up new, efficient earning opportunities for content creators. In the second quarter, The number of creators who earned money through video commerce grew by over 220% year-over-year. Resonant content and multi-scenario products like Story Mode continue to drive platform traction. In the second quarter, our total daily video views were up 31% year-over-year to 4.1 billion, among which Story Mode's daily video views grew by 76% year-over-year. It has become one of the key video consumption scenarios for our users, contributing to our growth in DAUs and ad revenues. Turning to our community, our users remain highly engaged and sticky. The users' average daily time spent on our platform was 94 minutes in the second quarter, reaching the highest second quarter level in our company's history. Their monthly interactions reached nearly $15 billion in the second quarter, up 19% year-over-year. Our core group of official members also increased by 26% year-over-year to 214 million, with a solid 12-month retention rate of around 80%. Our signature offline events also bring our community together in person. This July, we hosted two exciting offline events, Bilibili World and Bilibili MacroLink in Shanghai. Over 200,000 tickets sold out almost immediately. The tremendous response highlights Bilibili's strong influence among young generations, as well as users' willingness to pay for our unique community experiences. Finally, let's look at our commercialization and financial progress. Total revenues for the second quarter increased by 8% year-over-year to RMB 5.3 billion. Specifically, revenues from our advertising and live broadcasting businesses increased by 36% and 32% year-over-year, respectively. Meanwhile, we continued to improve our gross profit and margin. Our gross profit in the second quarter grew by a notable 66% year-over-year, driving our gross profit margin up to 23% from 15% in the same period last year. Looking at this in more detail, revenues from our value-added services business grew 9% year-over-year to $2.3 billion in the second quarter, primarily driven by increased revenues from our live broadcasting business, which grew by 32% year over year. As we further integrate live broadcasting within our video operations, we have opened up multiple opportunities to expand and diversify our live broadcasting content by converting content creators into live broadcasting hosts. In the second quarter, the number of monthly active live broadcasting hosts increased by 15% year-over-year. In addition, we are exploring new live broadcasting products to create more paying channels for our users, including live celebration events We expect our ongoing integration activities to support our revenue growth in the second half of 2023. By the end of June, we had 20.5 million premium members, over 80% of whom are on an annual subscription or auto-renew package, highlighting our trust-based user relationships. In Q3, we released several highly anticipated Chinese anime titles, including Fog, Shield of Five Elements, Wushang Wuxing, Xichuan Huanzi Lingtian, and our self-produced title Link Click Season 2, Shiguang Dai Liren, Di Er Ji. To bring more exclusive high-quality content to our premium members, turning to our other titling business, As we progress our initiative to integrate sales conversion with ad products, we believe we have found an effective way to convert our high-quality traffic to advertising revenue growth. For the second quarter, our advertising revenues grew 36% year-over-year to $1.6 billion. mainly led by our performance-based ad revenues growth, which increased by over 60% year-over-year. Ad revenues from our brand and SPARCO offerings also grew by a double-digit percentage year-over-year. Our top five advertising verticals in the second quarter were games, e-commerce, digital products and home appliances, skincare and cosmetics, and food and beverage. Our continuous improvements to our integrated industry ad solutions have also helped us gain more ad budget spend from industries such as games and e-commerce. specifically by introducing video commerce products, and revenues from the e-commerce industry increased by 144% year-over-year in the second quarter. Meanwhile, content creators were able to benefit from more ad opportunities. The number of creators who earned income through video commerce grew over 220% year-over-year. Moving forward, we will continue to build our commercial database, refine our algorithms, as well as optimize our ad product offerings. We are confident that we can improve our ad revenues per DAU and achieve solid growth in the second half of 2023. As for our games business, our revenues will RMB $891 million for the second quarter. a 15% decline from the same period last year. The year-on-year decline was mainly due to a lack of new game launches in the second quarter and a growth in decline for certain titles. Our top two performing games, Azura Lane and FGO, remained stable. Particularly, during Azura Lane's six-year anniversary, the game reached a new peak in paying users and revenues. In addition, we have also successfully extended our exclusive license of Azura Lane for another five years. In July, we launched our first self-developed game in the female romance genre Al-Qaeda Land Records, Yaoguanglu Ruai Shi Gongzhu. Welcome by a host of female users, the game ranked number one on the iOS free download chart shortly after its release. We are actively working on developing more games that users love. In the meantime, we have seven new titles that we plan to release in domestic and overseas markets in the second half of the year, including the highly anticipated game Pretty Derby, Shanyao Youjing Shaonu, Pretty Derby is scheduled to launch on August 30 and is now available for pre-registration. Over 2 million players have already pre-registered as of today. Given said that, the launch of Pretty Derby as well as few self-developed titles were delayed by several months than we initially planned. Due to lower revenue contribution from games and other non-core businesses such as IP derivatives and others, We now expect the full year 2023 revenue to be between RMB22.5 billion and RMB23.5 billion. As I mentioned earlier, our key financial goal for this year is to improve our gross profit and narrow losses. We have delivered on this goal with 66% increase in gross profit and 51% cut on adjusted net loss in the second quarter. Look ahead, we are committed to further improve our gross profit and control our expenses, and meaningfully cut down losses in the second half of this year, and reach our break-even target by 2024. As we progress on achieving our financial target, We will continue to lead the healthy growth across our platform and enrich the everyday life of young generation in China. This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the second quarter of 2023. As mentioned in Mr. Chen's remarks, our financials continue to improve. We are improving our margins and showing clear results in our bottom line with narrowed losses. Total net revenues for the second quarter were $5.3 billion, up 8% compared with the same period last year. Our total net revenues breakdown by revenue stream was approximately 43% VAS, 30% advertising, 17% mobile games, and 10% from our IPV derivatives and other businesses. Our cost of revenues decreased by 2% year-over-year to RMB 4.1 billion. driving our gross profit to $1.2 billion, up 66% year-over-year. Our gross margin was 23%, up from 15% in the same period last year. We expect gross margin to continue to improve throughout the back half of the year. Our total operating expenses were down 14% year-over-year to $2.5 billion. Tight control of our expenses is ongoing while we improve our monetization at the same time. We cut sales and marketing expenses by 22% year-over-year to $918 million. While our DAUs grew by 15%, as a percent of total revenues, sales and marketing were 17%, compared with 24% in the same period last year. G&A expenses were RMB 539.7 million down 14% year-over-year. R&D expenses were RMB 1 billion down 7% year-over-year. Our net loss and adjusted net loss were RMB 1.5 billion and RMB 964.1 million, respectively, narrowing by 23% and 51% year-over-year, respectively. Our adjusted net loss ratio in the second quarter was 18%, improving from 40% for the same period a year ago. Turning to our capital allocation and liabilities management, in June 2023, we completed the repurchase ride offer for our 2027 nodes with a total principal amount of $746 million. As of the end of the second quarter, Our outstanding convertible bonds totaled a principal amount of $876 million. As of June 30, 2023, we had cash and cash equivalents, time deposits and short-term investments of $14.3 billion or $2 billion. We believe this amount is sufficient to cover all of our remaining convertible bonds and fund our future operations. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question, please press star 1 and 1 on your telephone and wait for your name to be announced. For the benefit of all participants on today's call, If you wish to ask a 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 a follow-up question, please rejoin the queue. We are now taking the first question. And the first question is from CICC. Please go ahead. Your line is open.

Thank you for taking my question and congrats on advertising towards profitability. My question is about user engagement. The DAU further increased in the second quarter, so what's the DAU trend going forward? And can management share more details on the user engagement during the recent summer holidays? Thank you.

Since last year, I have been emphasizing that improving profitability and achieving healthy DAU growth are the two most important things for the company. This is what we are doing in our actual work.

Since last year, I have been emphasizing increasing our earning power and achieve healthy and sustainable DAU growth are the top two priorities of our company, and we have been exercising on that strategy.

In Q2 this year, our DAU increased by 15% to 9,650,000 In the second quarter, with cell cell marking down 22% young year, we have grow our DAU by 15%, reaching 96.5 million.

And our daily user time span reached 94 minutes. This is the record high of same period in our operating history. And our overall time span of the entire community grew by 22% year over year. All of above matrix shows a very healthy and robust growth of the community.

Why do we pay so much attention to the health growth of DAU? Because we believe that the growth of DAU is the premise and basis of the need to achieve profit. In the past few years, we have gradually explored a method of turning traffic into income through advertising and live broadcasts. We believe that this growth of DAU and income will form a direct loop of the wheel.

The reason why we have been emphasizing on the healthy growth of our DAU is because we believe the healthy growth of DAU is the foundation and preliminary requirement for Bilibili to achieve sustainable profit. And we believe we have already discovered an effective way to convert our high quality traffic into increasing top line through advertising and live broadcasting. And we believe with this effective route and methods, we can achieve DAU and top-line growth, and this will be a virtuous cycle.

In the second quarter, our advertising and live broadcast businesses achieved 36% and 32% growth. This figure is above the average level of the industry.

In the second quarter, our ad revenue and live broadcasting revenue achieved 36% and 32% young yield growth respectively, which exceeded the industry average growth a lot.

We can see that the DAO and the Japanese market have maintained healthy and strong growth. As for the outlook into the summer, given that we're in August in the period of the summer vacation, we have been witnessing and experiencing a strong DAU and daily user time spent growth.

We do expect that in the third quarter, our DAU can surpass a very exciting milestone of 100 million. And we also expect our average daily time spent can reach a new historical high.

We are confident that under the premise of controlling market costs, we can attract and retain more users through Bilibili's high quality content and community, and achieve DAU's health growth. At the same time,

We are very confident with tight control on sales and marketing expense, we can continue to attract our users with high-quality content and return our user with our engaging community and achieve DAU's sustainable and healthy growth. And we also believe this high... traffic can be effectively converted to our sustainable top line growth. Next question please. Thank you.

Thank you for the question. We are now taking the next question. Please stand by. And the next question from Li Zhang from Bank of America Securities. Please go ahead. Your line is open.

Hi. 我的问题呢,也主要是关于广告的,可以请管理层跟我们分享一下这个2Q的超预期的广告增速背后的主要的driver是哪些,尤其是我们在618期间整体广告的表现,还有就是接下来怎么看整个2Q广告业务的outlook,还有我们最近新的这个直播带货的广告的贡献应该怎么看呢? Thank you for taking my question and congrats on the solid advertising growth. My question also relates to ad business. Can you share with us the major driver of the ad business following the strong base of second quarter? Also, can you give us some updates on the June 18th promotion growth on our platform. In addition, how should we look at the second half of ad growth availability and how should we think about the new business e-commerce streaming development to our ad business? Thank you. 第二季度的广告收入,我们实现了同比增长36%。

In the second quarter, our ad revenue grew by 36% in a young year.

Overall, for the first half of this year, our ad growth rate has exceeded the industry average. At the same time, if you look at the ad revenue as percentage of a total revenue, it has increased from 25% in last year to 30% in the second quarter, which directly leads the growth of our gross profit.

This core drive, in fact, is similar to the strategy mentioned by Yi Zhong and Yi Heng last season, which is still effective. Yi Heng said that we would say that this is a technology platform's ability and data ability, including optimized recommended models, including improved ad storage and matching efficiency, as well as AIGC to improve ad efficiency, etc.

The one horizontal, one vertical strategy we mentioned last quarter is beginning to pay off, and that's been driving our advertising revenue growth. The one horizontal, actually referring to the technology middle platform and the data capability, includes optimizing the recommendation model, improving the advertising inventory, and matching efficiency. and the application of AIGC to improve overall ad efficiency.

宜仲呢,其实我们内部是指为六大垂直行业, 包括游戏,电商,3C数码,大快销,汽车,网教金等, 提供了B站有效的行业投放模型。 其实在电商跟游戏等行业已经收到特别明显的一个征数跟收效了。 在第二个季度,电商行业的广告收入同比增长了超过140, 那游戏的同比增长实现超过了40%, 电商是同比增长超过了140。 The one vertical is referring to the six customized industry ad models, including games, e-commerce, FMCG, automotive,

and internet service, among which e-commerce and games starting to show very positive results. In the second quarter, ad revenue from e-commerce industry grew by over 140% year-on-year, and advertising revenue from game industry grew by over 40% year-on-year.

The second reason is that since last year, we have stick to the integration of content and commercialization.

and expand ad inventory in different scenes of the community on the basis of ensuring user experience. In the first half of this year, it has formed very good growth momentum and drove the accelerator at revenue growth.

Thirdly, the industry should also note that in the second quarter, we established a trading eco-centre, which is mainly what we call the goods-related business. We use trading as a basic ability to integrate the trading scene into advertising products, and further promote revenue growth. In fact, this year, the revenue generated by advertising is between 10% and 20% of the total revenue. Thirdly is that many of you probably already aware that we have established the treating ecosystem center

to focus on building video e-commerce related capability in the second quarter by integrating the transactional scenario into the advertising products to further boost the revenue growth. We expect the video e-commerce related ads will generate about 10% to 15% of ad revenue this year. And in the next few months, We also plan to upgrade the membership shopping go tab on our main page to shopping tab and creating a new entrance for more commercial opportunities.

We expect to see a growth of more than 50% to 60%. Here you can see the new fire plan with Ali. The result is much more than expected.

As for the June 18th period promotions, how you performed, through our in-depth data collaboration with e-commerce platform, the revenue of the e-commerce industry, ad revenue from e-commerce industry, including transaction scenario during June 18th period, actually grew by 200% year over year. And we expect to achieve 15% to 16% ad revenue year-on-year increase from e-commerce industry during upcoming Double 11 Festival. As for examples, we actually did a collaboration with Alibaba's SPARK program, aka Xinhuo Jihua, and the results exceeded our expectations.

There is a very interesting and expected figure here. 70% of the users who enter Taobao's store are new customers, even more than 90% of some industries. So as long as the advertisement is popular in Bilibili, they will get more and more new customers, and within 15 days of the release of the collaboration manuscript, there will still be valuable group transformation. This is the long-term advertising value we are talking about internally.

There are a few interesting data points I can introduce. About 70% of the user who entered Taobao through Bilibili were new customers, and this ratio reached even to 90% for a certain industry. That shows that we have the effective ability to consistently convert user to advertisers in addition Billy Billy user maintained a very high conversion value 15 days after the related video was posted and during June 18th period the app revenue from Alibaba actually increased by 300% year-over-year

You may be more concerned about how we define and do this, including how to define trade and consumption. Now all content platforms are doing their own e-commerce, the so-called closed ring e-commerce. At this moment, Bilibili still chooses to stick to the open ring ecosystem and actively work with e-commerce platforms and brands to continue to expand the trading scale in Bilibili.

While many other content platforms choose to build their own e-commerce platforms, Bilibili, on the other hand, will choose to take an open approach, partnering with e-commerce players and brand owners to grow the sales volume together on Bilibili.

First of all, we will see that at the very beginning, we want to train users in Bilibili's consumer mindset. Young people must have the desire to consume and the ability to consume, but in Bilibili, consumer goods actually need to establish a consumer mentality, so we are still very confident that we can release their consumer power for a long time. In the first half of this year, there were nearly 30 million users who created trading-related behaviors by clicking on the video comment section of Bilibili. As users further release their consumer needs, I believe there will be a lot of space in the future. Now, the number of trading videos in Bilibili has increased by 8 times, and the number of live broadcasts has also increased by 7 times.

First of all, cultivating users' consumption behavior and mind share availability is our top priority. We believe that the young generation has strong willing to consume, and building the mind share is very important as we unleash their consumption power on our platform. In the first half of this year, Near 30 million users clicked on the shopping link on Bilibili's video commentary section, which lead it to a transaction-related behavior. As we unleashing our user consumption demand, the number of videos that carries product links increased by eight times in the first half of this year. And the number of live broadcasting e-commerce shows increased by seven times in the first half of this year.

But it's not just these people. Wang Shifu and Xiao Maomao, Li Deng, Bao Jianshao, Da Wu Shiyan, etc. They proved the establishment of this model. There is also a very interesting point. In addition to the history of Bilibili, there are no female users. Or Bilibili's female users have no consumption power. Bilibili's female users accounted for 45% in our image. From our original product, the delivery plate, we can see that

Secondly, we will continue to help our content creator to achieve sustainable operations through our video e-commerce initiatives. More content creators already started to try out Bilibili video e-commerce. This includes but not limited to many well-known content creators such as and et cetera. We are very delighted to find the model is very valid and successful, and this also broke the rumor that Bilibili's users have no consumption power, and actually, as a matter of fact, from the data that's shown that we have a lot of female user with consumption potential and power. Actually, 45% of Bilibili users are female. We do notice that they do have strong willingness to consume on Bilibili, and they have strong purchasing power.

第三點,我們會嘗試更多的品類, 形成有B站特色的品類結構, 就除了B站平常很優勢的大家熟悉的IP衍生品, 就是我們所指的會員購, Huiyanggou is actually a second-hand related extension. These people will spend money on Bilibili to play games and watch videos. At the same time, they will also buy around Bilibili. This is our strong product category. In addition, we will also explore food, makeup, 3C digital, home, home, etc. Here is a very interesting data. In mid-April, Xiaomi's new machine will be sold live and brought to Bilibili for trial. Thirdly is that we intend to try more categories

on top of our traditional strong verticals. In addition to the IP derivative, aka as our membership shopping, which is focused on the ACG preferential products and content, we intend to explore more categories such as food, beauty, 3C and digital products, home appliances, and etc. And here's an example. In mid-April, Xiaomi launched a live broadcasting e-commerce show promoting its new cell phone. Based on the data that I have in hand, Bilibili ranked number one in terms of GMV among all content platforms. It not only reflected that the strong word of mouth influence that we had among our young user group, but also the strong consumption power our users had.

I think the Bilibili ad model has evolved from establishing brand perception and mindshare

to a true integrated app solution, a full advertising chain of brand building, seeding, and self-conversion.

In the first half of the year, we upgraded our game, e-commerce, and trading strategies. In the second half of the year, I will carry out strategies for the original advantages, including large-scale sales and 3C numbers. In the first half of this year, we have upgraded our industry app solution for game and e-commerce and transactional strategy, and it's already starting to show positive results. In the second half,

I personally plan to conduct additional upgrade for our leading ad industry, such as FMCG, 3C, and digital products. We believe as we deliver healthy and sustainable user growth, we are confident that we can achieve 25% to 30% ad revenue growth on a full year basis, young year. Thank you. That concludes this question's answer. Operator, next question, please.

We are now taking the next question. Please stand by. The next question from Kenneth Fong from Credit Suisse. Please go ahead. Your line is open.

我的问题是我看到公司调低了对全年的收入的指引。 请问这个是出于什么样的考量? 我们全年亏损收窄的目标还能实现吗? 我激烦一下。 Thank you, management, for taking my question. We noticed that we lowered the full year revenue guidance. Can you share with us the key considerations behind? Are we still on track for narrowing losses for this year? Thank you.

The reason why the guidance update is largely due to two reasons. Number one is...

number of our games launch plan was delayed. And secondly is certain non-core business such as our comic and the IP derivative and others business and that is in the period of adjustment of strategy and its revenue is lower than expected.

But we can see that the reason why our revenue dropped is actually It's not a fundamental change in terms of our revenue, or it's not a change in the ability of our core revenue. For example, I'm talking about the delay of the game. Although it's delayed, it also determines the release time. We believe the reason for guidance update, the court is for a temporary phase change, and it's not a change of foundations.

the core business actually remains intact. For example, the delay of games is just that we're recognizing the revenue a little bit later. For example, Pretty Derby has already scheduled to be launched on August 30th, and we will be releasing this game on that day. This is confirmed and certain.

Our expectations for this game will not change at all.

And our outlook for and our confidence in the quality of the game and the revenue is unchanged.

Yes, and as you can see, in Q2, our platform's core business, the income from live streaming and advertising, its growth is very good.

And as you may have already seen that in the second quarter, the core business, literally like broadcasting and advertising, has achieved very solid growth.

We do expect that in the second half of this year and look forward to 2024,

the advertising and live broadcasting business will sustain a very healthy and solid growth.

Yes. And finally, I would like to say that in fact, at the beginning of the year, we have already made it clear that the company's financial goal is first of all to increase the net profit and reduce losses. Therefore, this year, for all our businesses, we will prioritize ensuring the growth of net profit.

In the beginning of this year, we have set our financial target to increase gross profit and narrow our net losses. So as our financial requirement or KPIs to each department business line is to ensure the absolute dollar growth for its gross profit. 今年我们是在策略上减少了部分低毛利或者亏损的。

product and business investment. So, although this part of the business income has been affected, but our total profit has achieved faster growth.

Strategically, we have lowered the revenue contribution of low margin business or loss-making business. Even though some of the revenue growth rate has been impacted, However, the absolute dollar of our gross profit has sustained a very healthy and robust growth.

In the second quarter, our gross profit grew by 66% a year.

And our growth margin has experienced four consecutive quarterly growth. And our adjusting net loss has narrowed by 51% a young year. I'm confident to achieve our loss-cutting target for 2023. and achieve our break-even target by 2024.

Yes, this is Sam. I just want to add that on the loss reduction side, even though the revenue growth rate and encoder chance are well below the expected, but we are still confident to achieve the loss-cutting target we set in the beginning of this year, which is to cut our just operation loss by only 3 billion. so through the gross profit increase and expense control. And notably, in the second quarter, our operating cash flow was close to breakeven. We think there are good chance that we can achieve operating cash flow quality in the fourth quarter this year. Additionally, we are confident to continue to improve our gross profit margin in the second half of this year and achieve our breakeven target by 2024. Lastly, the updated full-year guidance reflects our current projection of various potential outcomes. We will try our best to ensure smooth product launch as well as achieve our goal of increasing the gross profit and narrowing losses. Thank you for your question.

Next question, please, operator.

We are now taking the next question. Please stand by. The next question for He Wen Zhang from China Renaissance. Please go ahead. Your line is open.

So thanks for taking my question. My question is on our game business. Can you discuss on the pipeline, and especially for the pretty lobby, how should we think about, you know, expectations? And also, can you talk about our self-development game strategy and direction? Thank you.

Five of them will be released in China, and two will be released overseas.

In the second half of this year, we have seven titles in our pipeline ready to be launched domestically and internationally. Among those seven, five of them have already gained approval and ready to be launched in the domestic market. Two will be launched internationally.

Right. As for the highly anticipated game Pretty Derby,

We have already scheduled the launch day to be August 30th. And right now, within just two weeks of preregistration, over 2 million users have already preregistered for this game. This is a new record in our operating history for the preregistration month.

Because the players are really looking forward to it, so when we were working on Shining Girl, we really paid attention to it. We spent a lot of effort to make it more local, and to ensure that the players can experience the original taste of the game. This is also the reason why the game is delayed than expected.

Just because it's such a highly anticipated game with a large fan base, we actually spent a lot of effort doing the localization work, making sure that our gamers will be having the very original Pretty Derby experience. That's actually one of the reasons why it has been delayed by several months.

Because our team should say, We believe that Bilibili's game launch team is the best ACG game launch team in China.

and they are very experienced and they will make sure a very smooth and successful launch of Pretty Derby and we are confident Pretty Derby will be a very successful title and also has good user feedback and reputation.

Regarding the 2D games, there will be two 2D card games.

As for our self-development pipeline, we actually have two ACG card games that will be launched in the second half of this year. This includes one game called Threat Sluder, which was already launched. And there will be another game called Illusia. This will be scheduled to launch in October.

As for the self-proclaimed games, I believe everyone has seen that, especially this year, the competition in the game market is getting more and more intense. So our self-proclaimed games will definitely stick to what I said before, focusing on our advantage. At the same time, I will value the success rate very much. I don't want to be in the self-proclaimed game industry, because we are not a company that has been doing very well in the self-proclaimed game industry before. I think this is where I have a positive mindset. One step, one footprint. First of all, to ensure that our game will succeed. Then, after it succeeds, we will make the next goal. As for our self-development game strategy, as you may be aware, there's been a very heavy competition among the game industry this year. As for our own self-development game, the strategy will remain unchanged, which is focused.

focus on the content, on the genre that Bilibili has the most advantage of. Me personally will be spending a lot of time to ensure a success rate as we have only started doing self-development games and we will be very down to earth and grounded to take a step-by-step approach to ensure every game that we launch will be high quality and will be successful. This is the target that I personally will spend a lot of time to ensure and also require our team to achieve.

The second is long-term operation. Because I think future games must be long-term operation, otherwise they can't make money. So from my point of view, Secondly is about the long-term operation of the game. I believe in the future all the game will be a long-term

operation cycle. Otherwise, it won't make any profit. So this is the requirement I have for our self-development game. If the title from day one is not a long-term operation title, we won't allow it to be set up. As for the license game, if it's not a long life cycle game, we won't sign it. We won't license it. As for the game that's already online, the long life cycle management and operation will also be one of the most important KPIs I have for the team.

In the past, in terms of game operation, in terms of long-term operation, Bilibili was able to do a very good job. Bilibili has reached its sixth anniversary this year. Our FGO, As for Bilibili, we have very good tracking records

making sure a long life cycle operation. As a matter of fact, our Azure lane just celebrated six years of anniversary. And FGO just last week, we celebrated its seventh year anniversary. And all of the user data matrix remain very healthy for both of the games. As a matter of fact, during the sixth anniversary of FGO, its DAU even surpassed the six years anniversary DAU. So we will stick on this route and making sure that all of our game will sustain a long life operation cycle. Operator, next question, please. Thank you.

We are now taking the next question. Please stand by. The next question from Lincoln Kong from Goldman Sachs. Please go ahead. Thank you, Guan Yicheng.

This is my question. My question is about AIGC. We also saw in B站 Investor Day that the company also said that AIGC may have some ideas about the production efficiency, marketing tools, and even AI social. So my question is about AIGC's application to Bilibili. So from past investors, we've already seen some development or strategy showcase in terms of AIGC speeding up the production efficiency, the marketing promotion tools, as well as the AI integrated search. Could you imagine elaborate more around how we think AIGC could benefit Bilibili? Thank you.

We believe this is a breakthrough technology that AIGC can bring to the industry.

the way we look at it, it equals to the mobile internet that happened 10 years ago. And this will not only benefit Bilibili, it will actually benefit everyone.

For Bilibili, because our main business is video and ACG, we can already see that AIGC has a significant increase in video and ACG. For example, it can greatly improve the efficiency of the creator's content. For example, we can see that in terms of community management, because of the language model's understanding of content, it can make our community experience better. In fact, the experience directly with Bilibili and the scenes related to business applications, we have seen some opportunities for AIGC to make great progress.

So as for Bilibili, our core business is video and ACG, and it has been very clear that AIGC can enable and increase efficiency in a large amount on both fronts, for example, on content production as well as content recommendation. Also, based on the LLM, we can increase a lot of efficiency of managing our community by understanding what the text means, the content means within our community. And we believe this technology, AIGC, has multi-faceted applications and scenarios to help us to improve all around user experience.

Yes, in fact, we have already started to do some real-time things, and then use AIGC technology to improve our user experience, to improve our business capabilities. For example, at the beginning of the press conference, what you heard was Sam's long speech. In fact, it was not said by Sam himself. It was said with our self-proclaimed AI voice tool. Anyway, after I heard it, I couldn't hear it.

As for the application scenario, actually, we have already conducted some extended research and development, and we believe there's a lot of scenarios that we can leverage. For example, the prepared remarks that were spoken by Sam just now before this Q&A session, actually, it was not actually conducted by Sam. It's powered by us. our self-developed AI tool, text-to-speech, TTS tool. And similar products like this, we have already started to research and develop and apply it in our various scenarios.

Actually, this technology can already play a role in our current business environment. For example, when BML opened this year, And there are other examples. For example, this year's Bilibili Macro Link, our virtual host, 22N33, their voice was also generated by the same tool, TTF AI tool, that's Bilibili self-developed. Yes, for example, in Bilibili, there are many knowledge-based videos. The core of this kind of video is the text. After the text is written, the uploader will read the text. There is such a technology. After AI helps them read, they can stop recording when they feel satisfied. They can re-record when they are not satisfied. This can also save them the time to create the video.

And another example would be knowledge-related video creation. As many knowledge content creators, they generally write the text and they record their voice. With the help of this AI tool, it can largely improve its production efficiency. 再比如说像大圆模型,就虽然我们没有

As for the LLM, even though we haven't marketed quite aggressively, but actually we have already started to apply LLM in various daily operations. Another example would be on the content auditing side. In the past, we have to spend a lot of human resource and power in managing the content.

With the help of large language model, because it can understand the text, the meaning, and all of the implied meanings behind the task, it can drastically increase the efficiency of how our content audit team process the content.

再比如说对于搜索的体验,就是大语言模型也是能够去增强我们B站的搜索体验的。 There is a lot of content created by users on B站, which carries a lot of information. But a lot of information may be scattered in some videos. And now we are testing an AI-enhanced search function. You can directly ask questions in our search box. Then our large source model will be able to answer users with some knowledge and information that B站 already has. For example, let me give you an example. A lot of users may go to see what characters are worth training after the original 4.0 is released. What cards should be drawn? This is a very new information. B station must be the most complete because our game content is very strong. So in the past, users may have to finish four of them. This one is called the master. After the attack video, he can get a message, but now he may ask a question in our search box, which characters are worth training in the original 4.0, and then our large source model can pass through some of the attack videos that have been posted recently. He can tell him that he can answer directly with words, which characters are worth training and which characters are worth drawing. This is a very obvious improvement in the user experience.

And another application scenario would be enhanced search, because Bilibili has a vast content library, and each video carries a lot of scattered information. And we can leverage LLM to drastically enhance the search efficiency. We are actually beta testing a new enhanced search that, by just typing questions in our search box, our large language model can summarize and answer questions. A very valid example would be with the recent version upgrade of Jensen Impact. People can just simply ask which card is worth drawing and which character is worth spending time to improve. And the large language model can summarize the valid information and just provide it to the user. Versus in the past, they have to watch several videos to summarize that content, that information. Now, with just a stroke of hand, they can get the correct and fast answer.

For example, we also use the AIGC capability to develop a small function. We call it a small assistant for AI video. In fact, That is, when you finish watching a video, if you want to remember what this video is about, but you may not remember it very clearly, you can ask this little assistant directly. For example, what kind of specific information is it in this video? For example, you watched a video of an Apple Mac MacBook review, and then you can ask this little assistant directly after watching it. You said that the MacBook in this video What is the difference between the M2 CPU model and the M2 CPU model? What is the difference in price? Then this assistant can directly answer you. This can also enhance the user's experience of watching videos.

Another function upgrade that we are testing is AI assistance. This will accompany users when they are watching a video, help them to summarize and extract useful information. For example, In a MacBook review video, user can ask the AI assistant, what's the difference between M2 Pro chip and the M2 chip? What's the price difference? What's the efficiency difference? And the AI assistant can extract the exact information to help the user to get what they want. All of this will help to increase visibility user experience.

We still pay a lot of attention to AIGC because I think this is a great opportunity for a content platform like Bilibili. It's like 10 years ago, mobile Internet. It allows people who watch videos on Bilibili to grow tenfold. Yes, I think AIGC is also an opportunity. If we can effectively use this technology, it can improve the user experience very well.

Internally, we really value the AIGC technology. We believe this is a once-in-a-lifetime opportunity. This will be similar to the invention of mobile internet, which enabled Bilibili's mobile user to grow by tenfold. And we believe with the AIGC technology matures, we can leverage this technology to largely enhance our user experience, our content creators' experience and productivity, as well as increase our commercialization efficiency. That concludes the question. Operator, we can close the call today.

And that concludes the question and answer session. Thank you once again for joining Bilibili's second quarter 2022 financial results and business update conference call today. If you have any further questions, please contact Juliette Yang, Bilibili Executive IR Director or Piacente Financial Communications. Contact information for IR in both China and USA can be found on today's press release. Have a great day.