Bilibili Inc.

Good day and welcome to the Bilibili third quarter 2023 financial results and business update conference call. Today's conference call is being recorded. At this time, I would like to turn the conference over to Juliet Yeung, Executive Director of Investor Relations. Thank you. 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, Juliet. And thank you, everyone, for participating in our 2023 third quarter conference call to discuss our financial and operating results. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. The record high community growth we achieved in the third quarter is a testament to the power of our self-driven content ecosystem. There's a continuity drawing in more users and keeping them highly engaged. Notably, our DAUs increased by 14% year-over-year, surpassing the 100 million milestone and landing at 103 million in the third quarter. MAUs also grew to a record high of 341 million, and the DAU to MAU ratio in this quarter improved to 38.2%. Meanwhile, our users' daily time spent also reached a historical high of 100 minutes, with total user time spent increasing by 19% year-over-year. We are encouraged by the strong user growth momentum and the direct correlation with our monetization efforts. Improving margins, narrowing losses, and maintaining growth has been our key objective this year. In the third quarter, we leveraged our expanding traffic more efficiently, integrating commercialization scenarios and products in our content ecosystem to drive quality top-line growth. This is evident in our advertising and advanced business, which grow by 21% and 70% year-over-year, respectively. Furthermore, our gross profit increased by 38% year-over-year, and our gross profit margin rose to 25% from 18% in the same period last year, marking the fifth conservative quarter of gross margin improvement. Our tight expense control measures reduced our total operating expenses by 12%. including a 19% decrease in sales marketing expenses, an 8% decrease in G&E expenses, and a 6% decrease in R&D expenses on a year-over-year basis. As a result, our adjusted operating loss and adjusted net loss both narrowed by 51% year-over-year in the third quarter. Notably, we achieved an important milestone of generating positive operating cash flow in the third quarter. Demonstrating our business operations have entered a positive cycle and marking a step forward in our profitability goals. 2023 has been a year with continued changes across industries and markets. To adapt to the new paradigm, we are increasing our focus on our core business, trimming expenses in areas yielding lower returns. In the fourth quarter, we have further stimulated our organization and expect our total headcount to be around 9,100 by the end of 2023, compared with to 11,000 at the end of 2022. Additionally, future project plans will continue to be ROI focused, With these measures, we will become limber as an organization to better align ourselves with the new environment, setting the stage for BDB's long-term success. With that overview, let's look at our co-pilots of content, community, and commercialization in more detail. Beginning with content and community. The key metrics that represent the quality of our community continue to rise. The number of daily active content creators on our platform increased by 21% in the third quarter. And the monthly new content submissions were 21 million, up 37% both year over year. More content creators and more wider fan base during the third quarter. The number of content creators with over 10,000 followers grow by 36% year-over-year. Total daily video views increased by 26% year-over-year to 4.7 billion, among which story mode video views grow by 45% year-over-year. As I mentioned, users are spending more time with us than ever before. With user daily time spent, reaching an all-time high of 100 minutes. Meanwhile, monthly injections among our users also increased by 18% year-over-year, reaching 17 billion. By the end of the third quarter, we had 224 million official members who have taken and passed our community exam, a 23% increase year-over-year. At their 12-month retention rate, remains strong at around 80%. Our content categories continue to expand, attracting more users and bringing new commercial opportunities for both content creators and the platform. Invariably, our users and content creators enter new life stages and new categories emerge, such as home decoration, relationships, baby maternity, and automotive. For example, new content submissions in home decoration and appearance genre grow by nearly 90% year-over-year in the third quarter. In parallel, content creators in this category and their earnings, as well as advertising revenues generated from the same category, have all meaningfully improved. Meanwhile, we have created more directed monetization opportunities for our content creators. A total of 1.68 million content creators generated income on Bilibili in the third quarter, up 34% from the same period last year. The adaption of video and live commerce has also brought additional channels for more creators to realize their commercial value. The number of content creators who earn money through video and live commerce in the third quarter grow by over 160% year-over-year. Additionally, this summer, our two signature offline events, Billy Billy World and Billy Billy Michael Link, attracted a gathering of over 200,000 young people in Shanghai to experience our unique community culture. The remarkable attendance underscores Bilibili's influence among the young generation and brought us more brand advertisers with incremental budget allocation. Lastly, I'd like to talk about commercialization. Total revenue for the third quarter was RMB 5.8 billion, flat year-over-year. Advertising revenues and vast revenues increased by 21% and 17% year-over-year, while offset by 33% year-over-year decrease in game revenues. We are encouraged by the progress in our ads and vast business, where the revenue growth potential has a direct correlation with the AU growth. Meanwhile, we have taken a closer look at our game business and made certain adjustments to better align ourselves with the new industry landscape. Looking at this in more detail, our growing and engaging community is the foundation of commercialization. As people spend more time and engage in more community activities, they are more willing to pay for Bilibili content and services. Looking at our vast business, Vast revenue for the peer rate increased by 17% year-over-year to $2.6 billion, mainly led by our live broadcasting business. The ongoing interaction of live broadcasting into our video universe continues to yield results. More content creators are stepping into live broadcasting as hosts, further enriching our live broadcasting offerings and enabling them to earn income. By the end of September, our premium members grow to 21.1 million, with over 80% on annual subscription or auto renewal packages, underscoring the trust and loyalty we have built with our brand. In the third quarter, we launched the highly anticipated self-produced anime Link Click Season 2 時光代理人第二季. which was well received by many new and old fans. In September, we announced 68 new Chinese anime titles at our 6th Made by Bilibili Chinese Anime Press event. Both of these titles will be released in the next few years, ensuring a continuous stream of beloved content of our premium members. Turning to our off-titling business, As we further integrate sales conversion tools within our ad products across scenarios, we are now more effectively converting our high-quality traffic into substantial ad revenue growth. In the third quarter, total advertising revenues grow by 21% year-over-year, reaching RMB 1.6 billion, mainly led by performance-based ads. which grow by over 40% year-over-year. Notably, our strong ad revenue growth contributed to meaningful gross profit growth, with higher revenue contribution from our performance-based ads. For the third quarter, our top five ad verticals were games, digital products and home appliances, e-commerce, food and beverage, and automotive. Despite the third quarter traditionally being an off-peak season for e-commerce advertising, our strengthened advertising solutions enabled us to secure a greater share of advertising budgets in this competitive industry. During the W11 Shopping Festival in the fourth quarter, we further strengthened our data collaboration with e-commerce platforms. and upgrading our video and live commerce and products. The total GMV from our videos and live commerce products increased by over 250% year-over-year for the double 11 shopping season. Turning to our game business, total revenues was RMB 992 million, representing an increase of 11% quarter-over-quarter and a decrease of 33% year-over-year. The reason for the year-over-year decrease was due to a high base from the 2022 summer release of Space Hunter 3, as well as weaker-than-expected new game performance in the third quarter this year. Our Lexi games, Azuna Line and FGO, remained stable during the period. On August 30, 2023, we launched our exclusive licensed ACG title, Pretty Derby. On September 8, 2023, the game was temporarily removed from the App Store for content refinement, and we are working diligently to resume download access as soon as possible. The game industry has changed dramatically in the past two years. At the beginning of the fourth quarter, we closely reviewed our in-house game development projects We further streamlined our in-house development team and discontinued projects that did not meet our standards. Consolidating these operations will help reduce our future and expenses. That said, as a video community for the young generation, we process natural advantages in the game industry. We aim to further leverage our growing advertising capabilities to strengthen our game distribution power, as well as selectively invest in our in-house development to bring high quality games to our users and create value for our business partners. In summary, We are dedicated to reach our financial goal of gross profit improvement and a loss reduction this year. We have delivered on this goal with a 38% increase in gross profit and a 51% reduction of both adjusted operating loss and adjusted net loss in the third quarter. And we will continue on this path. At the same time, We strongly believe in the power of good content and community. 100 million DAUs is just another beginning for us to build on. We will stay true for our mission and continue to enrich the everyday lives of the young generation in China. This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the third quarter of 2023. As mentioned in Mr. Chen's remarks, our financial profile has significantly improved. We continue to gain operating leverage while building our community and video ecosystem. We have increased our gross pocket margin and narrowed our adjusted net loss for five consecutive quarters. Total net revenues for the third quarter was RMB 5.8 billion, on par with the same period last year. Our total net revenues, breaking down by revenue stream, were approximately 45% VAT, 28% advertising, 17% mobile games, and 10% from our IP directives and other business. Our cost of revenues decreased by 8% year-over-year to RMB 4.4 billion, driving our gross profit to RMB 1.5 billion, up 38% year-over-year. Our gross profit margin reached 25%, up from 18% in the same period last year. We expect our gross profit margin to continue to improve in the fourth quarter. Our total operating expenses were down 12% year-over-year to RMB 2.6 billion. In the third quarter, we cut our sales marketing expenses by 19% year-over-year to RMB 992 million, while our DAUs reached a record high. Sales and marketing expenses were 70% of total revenues, compared with 31% in the same period last year. G&E expenses were RMB 499 million, down 8% year-over-year. R&D expenses were RMB 1.1 billion, down 6% year-over-year. As a result, we narrowed our adjusted operating loss and adjusted net loss both by 51% year-over-year in the third quarter. Our adjusted net loss ratio in the third quarter was 15%, improving from 30% for the same period a year ago. Notably, we generated positive operating cash flow in the third quarter, demonstrating our business operation has entered into a positive cycle. As of September 30, 2023, we had cash and cash equivalents, time deposits, and shorting investments of RMB 14.5 billion or USD 2.0 billion. In the third quarter, we repurchased an aggregate principal amount of USD 14.5 million December 2026 notes with an aggregate cash consideration of USD 13 million. As of September 30, 2023, the aggregate outstanding principal amount of April 2026 notes, 2027 notes, and the December 2026 notes was US dollar 862 million. We believe our cash position is sufficient to cover all of our remaining convertible bonds due to lower than expected gain revenues. We now expect our 2023 full-year revenues to be at the lower end of RMB 22.5 billion to RMB 23.5 billion range. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

We will now begin the question and answer session. To ask a question, please press star 11 on your telephone and wait for a name to be announced. For the benefit of all participants on today's call, if you wish to ask your questions to management in Chinese, please immediately repeat your questions in English. The company will provide consecutive integration for management statements during the Q&A session. Please note that in the English interpretation, our English interpretation is for convenience purposes only. In the case of any discrepancy, management statements in the original language will prevail. Please limit your questions to one at a time. If you wish to have a follow-up question, please rejoin the queue.

One moment for the first question.

Our first question comes from the line of Zhang Xueqing from CICC. Please go ahead.

Good evening, Manager Chen. Thank you for accepting my question. Congratulations on the steady sales of another quarter and the balance of profit and loss. My question is about the users. The company's third quarter DAU broke its first record. The user market also performed well. I would like to ask about the company's view on the potential growth of users. Because there was a media report that the company proposed a DAU double target. I would like to ask about the path and time table of the goal reached by Manager Chen. Thank you. Good evening, management. Thanks for taking my question. And congrats on the third quarter. My question is about user growth. The deals passed the milestone of 100 million for the first time in the third quarter. And the user's time span reached a historical high as well. So what's your views on user growth potential? And recently media reported that the company has internally proposed a goal of doubling DAU. So can management share the path and the timetable for achieving this goal? Does it require increased expense in user acquisition? Thank you.

First of all, I think we are still in the wave of video. As a video product, I think as long as you do it well, in the current period, the number of users should grow. So I think when we talk about user growth within the company, the main method we use is to do the product well rather than increase the number of customers.

I think in the big movement of virtualization, a very natural process for a good video product to grow bigger and bigger by itself. That's why when we are talking about user growth strategy internally, we've been emphasizing on improving the content quality, improving the user experience, not mainly through the user acquisition.

Actually, since Q3 last year, we've been paying more attention to the cost of new products. That's why in starting from second quarter last year, we have been emphasizing on the ROIs of our user acquisition strategy.

As we are spending less in social marketing, we are actually growing more and more DAUs. And that is why we have been focusing on improving the operating efficiency, improving our product capability, and pursue simultaneous commercialization as well as the user growth virtuous cycle.

From the Q3 report, we can see that our DAU has exceeded 100 million, and our MAU has also created a new high.

In the third quarter, our DAU has surpassed 100 million milestones, and we also reached a record high of MAU numbers. And this is strong evidence that we have succeeded in our user growth strategy in the past year, and this is just a new beginning for us.

Some investors may ask, at this stage, shouldn't B站 pay the most attention to income growth? Why do we pay so much attention to user growth internally? The reason is simple. There are two reasons. The first is that I think all Internet platform products have a core competitiveness. Because you have more users, you can cultivate a larger group of users. and you can also have a richer content ecosystem.

The reason why we have been focusing on user growth is I think for all the internet product, the user base will be one of the key competitive strengths. The larger user base we get, the more content creator as well as the commercialization will come with it.

The second is And for internet product, user base is also the foundation for our commercialization. As you can see from Bilibili's commercialization model,

advertising and live broadcasting, its revenue growth has direct coordination with DAU growth.

In the third quarter, we had a 21% increase in our advertising business and a 17% increase in our promotion business. We have actually run through a positive cycle of growth from user-scale growth to commercial growth. In the third quarter, our ad revenue and vast revenue grew by 21% and 17%, respectively, on year.

And as you can see, we have already come to a strategy or form a virtuous cycle between our traffic growth and our revenue growth in advertising and the best specifically like broadcasting. At the same time, the revenue that grew from these two sectors has also converted to a certain part of that also converted to our content creators' income and also will generate more content creation on a platform. So from a content ecosystem perspective, it has also been very positive to our overall content ecosystem.

And I think our current user size still has a lot of potential. Because when I was doing research among users, I found that many of Bilibili's new users because we have a good reputation, so he came to use Bilibili. After using Bilibili, he would recommend us to his friends. In the past year, although the number of users has increased rapidly, we can see that the group of our app owners, including the richness of our content, including our community indicators, are actually very healthy and positive. This also means that we have a very obvious trend.

At this point, we still see great growth potential for our user scale. When I do the user research, I discovered that for Bilibili users, there's a great word-of-mouth effect. People feel good about the product. It will naturally spread the word and introduce new users. And if you look at the past year's data, not only we have achieved very strong user growth, We have also exceeded in many matrix in terms of community growth, video views and content creators numbers. That means that we have achieved a virtuous cycle in between the content user as well as the community.

I think if we can continue to make the content more prosperous, I believe as our content ecosystem continues to prosper, Bilibili should be able to attract more and more users because it's a

We think it's a very natural desire for all human beings to find good content and find friends who share the same interest.

So in the future, we will continue to use this way of making the product and content better, and make users grow naturally. And then in the process of market placement, we will also strictly test ROI and ensure that

going forward we will still largely rely on the product improvement content expansion to drive our user growth and pair with roi focused sales marketing and only invest in user acquisition when the roi makes sense that means only to acquire user when we're making money by investing in that user acquisition strategy. That is a mid to long-term user growth strategy for us.

Yes, I remember at the end of last year, I also mentioned to everyone that what I'm talking about inside the company now is nine words, increase profit, reduce loss, and ensure growth. These three points we have to do at the same time. We won't say that the first two points of sacrifice

end of last year i have raised the three key objectives for the company which is in margin improvement loss narrowing and maintain growth we want to achieve this three target at the same time not by sacrificing the first two target to achieve the last one that's all thank you i'll put our next question please

One moment for the next question. Next question comes from the line of Fang Wei from Mizuho. Please go ahead.

Thank you, Mr. Guan. This is my question. I would like to ask a few questions about advertising. I would like to ask... In this quarter, the advertising business, especially in terms of effectiveness, is in the third quarter. The main driving force is those. Then I would like to ask during the double C period, you just talked about the high-speed growth of GNV. I would like to ask how the advertising side performs. Also, I would like to ask how our recent business progress in video delivery and live delivery is. Finally, I would like to see how the development of the advertising business in 2024 will be. Thank you. So can management help elaborate on the key drivers for the ad business, especially DRS in quarter? And how's the performance during the W11 promotional campaign? In addition, can you update us on your progress on live streaming e-commerce and show video e-commerce? And lastly, how should we expect the segment growth for 2024?

Thanks. In the third quarter, our advertising revenue grew by 21% year over year.

Ad revenue as percentage of total revenue has grown from 23% the same period last year to 28% in the third quarter this year. And also it has drove the growth margin, growth profit improvement on a company level. 相应来说,核心吃冻在具体前两个季度也做了比较充分的介绍了。 So we've introduced our key strategy and the driving force of our app business in the past two quarter comprehensively, which has been the one horizontal industry solutions as well as the middle platform power improvement.

From the second point, from the industry point of view, the game and e-commerce industries are still relatively outstanding. Q3 is generally the flagship of the e-commerce industry, but e-commerce ads still have more than 90% of the same growth. In addition, we have also seen some changes in trends in other industries, including the car and medical industry. The vertical industry also has more than 20% growth. From an industry vertical perspective, game and e-commerce has been very strong. Despite Q3 being a traditional slow season, ad revenue from e-commerce still grew by 90% young years.

Additionally, we have been actively exploring other integrated solutions with other industries. For example, we've seen positive performance from automotive and healthcare industry, which also grew by 20% quarter over quarter. Going forward, we will continue to strengthen those industries' performance.

We have also improved our ad efficiency on a platform level, unleashing more conversion value across different scenarios.

In particular, performance-based ads grew by 40% year-over-year in the third quarter, which has become the main growth driver of our ad business.

Double 11's performance this year is still better than expected, mainly due to the growth of e-commerce platforms and advertising revenue, which is more than 80%. Bilibili will continue to open up within the reach of the market. We continue to deepen cooperation with major e-commerce platforms, including data construction. Recently, Ali's new fire plan, in fact, we have more than 160% growth during 618. That is, the cooperation of the brand has exceeded 70%. 所以B站为商家带来的新客率我们可以看到超过了50% 其中母音品类还是比较突出的 从B站用户到阿里的平台上的新客率更高达89% In terms of the Double Eleven Shopping Festival performances, we think the overall performances have exceeded

exceeded our expectations. Ad revenue from the main e-commerce platforms grew by over 80% year over year. We'll continue to adhere to the open-loop strategy and continue to deepen our data collaboration with the top e-commerce platforms. For example, ad revenue generated by the Alibaba Xinhuo project grew over 160% compared with the June 18th shopping festival this year. We've worked with more than 70 brands' advertisers to bring new users to the advertisers. Over 50% of the traffic converted to Alibaba were new users to those brand owners, and this ratio even reached 89% for baby and maternity verticals.

因为新火计划的征头以及实现 充分证明了B站广告投放的 后链路的转化价值。 所以除了阿里以外的话, B站也将跟其他的平台,包括京东, 最近也会上线金火计划。

The incremental ad budget brought by Alibaba's Xinhua project has actually proven the conversion value of Bilibili's performance ads. That's why in addition to Alibaba's Xinhua project, we launched Jinhua project, a collaboration program with Jindong recently.

During the Double 11 period, Bilibili's video and live streaming GMV increased by more than 250%. Bilibili's consumer and trading atmosphere is getting stronger as expected. During the Big Tree period, Bilibili's number of live streaming videos increased by more than 230%. The frequency of live streaming also increased by more than 100%. During the Double Eleven Shopping Festival,

the GNV generated from our video and live e-commerce increased more than 250% year over year. And we have gradually built up our consumption and trading atmosphere within our content community. During the shopping season, the number of video e-commerce related video increased by over 230%. and the number of live e-commerce sessions has also grew by 100%. Bilibili's content creator, Mr. Meadow, his live e-commerce GNV has reached 1.68 billion, which increased by over 400%. From the trading atmosphere, as well as the ad revenue growth, we're confident we can continue to build on this momentum and continue to grow our e-commerce related advertising revenue.

For this year's last Q and next year, we are still full of confidence in the ads. There may be further upgrades. For example, in the Bilibili community, we all know that it can deeply affect users' consumer sentiment. We will do our best As for the fourth quarter and 2024's advertising revenue growth trajectory, we remain confident. Here are some ways we are hoping to continue to enhance and improve

First of all is that we all know Availability's content can deeply influence users' mindset and the brand perception. We will be very focused and continue to build our brand app capability. The Sparkle platform will be the lever and performance-based app will be our accelerator.

At the same time, we will upgrade the overall advertising model. In the previous few Q&As, I have repeatedly mentioned that the method of integration and marketing is the most suitable for Bilibili's investment efficiency. The advantage is that Bilibili is growing more and more at the same time, and can increase the number of users at the same time, and thus gain a lot of revenue. In 2024, we will try to build up the content and brand assets of customers in Bilibili, as well as a long-term transformation model that can be built internally.

And secondly is we will continue to upgrade our advertising model. We've been emphasizing that the integrated marketing solutions will be visibly strong advantage. The reason why is that we can reach user from multiple media and scenario and achieve multiple ad revenue growth. And in 2024, we'll continue to upgrade and help our ad clients to build their brand equity with the Bilibili content community and help them to build a sustainable and measurable growth model.

The third point, I think, is overall efficiency. In the original advertising scene, we will insist on the efficiency part. At the same time, we will look for new scenarios that are suitable for different investment strategies. Thirdly is to improve the effectiveness and efficiency of our traditional ad scenarios and find new scenarios that are suitable for different advertising strategy.

Going forward, we'll continue to find a way to better collaborate between natural traffic and commercial traffic to improve our overall ad efficiency.

第四点是回归客户需求。 就是我们深度挖掘了四大需求, 在客户往后在B站投放的这个场景上应该能获得比较大的收益。 第一个是发新品。 Bilibili is the most concentrated video content community for young people. The third point is transaction transformation. The fourth point is large-scale marketing. Bilibili will combine the four major needs of customers to build an effective scene in Bilibili. Lastly is that we'll pay close attention to the four key needs of our brand, of our ad customers. Number one, new product launch. Number two, fear of aging. Number three, transaction-based

ad needs. Lastly is the seasonal marketing campaigns. We will build on these four key needs and to continue to build a very effective advertising solution. That's why I'm still very confident of our advertising revenue growth in the fourth quarter and a year forward we aim to continue to expand our marketing market share going forward. Operator, next question.

One moment for the next questions. Our next question comes from Felix Liu from UBS. Please go ahead.

My question is about our gaming business. We have noticed that some of our colleagues have recently launched their gaming business. The domestic gaming environment is indeed competitive year-on-year. So, first of all, I would like to see how the progress of our games is going. How will our future strategies for gaming business change and update? In addition, the game called Pretty Derby at the end of the third quarter, Let me translate myself. So we noticed that my question is on the game business. We noticed the game competitive landscape remain continue to be intense, and one of our peers recently exited their game business. So may I get your thought on your own in-house game R&D progress, how you think of the game business from here, and any update on our game Pretty Derby? Thank you.

Firstly, I'll talk about the Pre-Derby. We really value this game and at the same time we value user experience.

So that's why we'll conduct minor content refinement and technical upgrade as soon as possible and bring the game back to the app store.

And one thing I want to add is that for user already download the game, their feedback and experience

the feedback has been very positive.

Let's talk about the game. You mentioned that the game market is very competitive. I think this year's game market is not only competitive. The main reason is that it has entered a stage that is different from the past. As you mentioned, there has been a very competitive landscape in the game market this year. I think it's more than that. We think that the overall game business or game industry has entered into a new phase

where it's very hard to gain new users, and it has become a more saturated market.

When there is a new user force, the market is actually friendly to new products. As long as your game quality is good, you can make money. And when it comes to saving, even if your game quality is good, it may not work. You either do the best,

In the past year where we still see an incremental growth of gamers in the market, the secret to success is to bring a good quality game. But in the market where it's a saturated market, only quality is not enough unless you have the top of the top game quality, and the right timing.

Right, we can actually see, because it's already the end of the year, we can see that this year, in fact, the performance of most of the newly released games is not as expected. In fact, when we look at these games, we will find that their quality is actually quite good. However, they did not achieve the two points I just mentioned, either the best, or very different. It's come to an end of this year. We've noticed that we would find that most of the new game launch this year has

not meet their original expectation. But the quality of those games has been good. The reason why is that the game was set up three years, probably three years ago, where there was still an incremental gamer growth. Their target is to build a good game, not necessarily have to be the top game or the most unique game. And three years later, the time has changed.

So in terms of users this year, although there have been a lot of games released, these games are a bit homogenized. The difference is probably that my art score is 80 points, your art score is 85 points, and his art score is 87 points. However, he is actually involved in some details.

From the user perspective they would notice that for this year there's a lot of new games but they all look kind of the same probably with different artistic designs and for those Game developers, they have turned into a rat race of the minor details. Those rat race wouldn't necessarily mean new users and new income and new profit for users. They don't necessarily have to try out this new game, who look the same with others because they already have a game they've been devoted in.

So I don't think it's because the game market is getting smaller or it's because the game market is not active anymore. What we've observed is that the activity of the game users is still very high. Because the users who actually watch video games on Bilibili, I think they've been watching for a long time. And then the DAU of our video games is constantly increasing. This includes their discussion of the game is also very hot. They are also very concerned about new games. So that means not that means

not necessarily the game market is shrinking or less active. On the contrary, we still see the gamer has been very active from Bilibili's data perspective. The viewers in our game content verticals, the DAU and their time spent are actually increasing a lot. They also pay close attention to new games But the new game, which can convert real new users, needs to be very unique, very different from what the market is already offering.

So, in the new market environment, I think the game's standard has changed. As I mentioned before, I think new games He is in this new stage He has to meet three standards The first is long-term operation And then the second is that you at least have to be a hammer-type head You either have a head of all kinds It's a super head or a hammer-type head The third is that you have to be a reasonable cost Otherwise, because the cost is too high, you can't make money And then in the past That's a relatively follow-up or to make a difference with others through internal rolling. I roll art better than art rolls.

Given that we think the time has changed, the standards to invest in new games have changed now. We think there are three key criteria for new games to succeed. One is long-term operation. Second is to be the top of a niche market or be a super top title in the market. And lastly is focus on the ROI. And in the past, the copy-cast type of project setup or the rat race type of R&D investment does not work anymore.

We have been following this standard this year to sort out one of our internal self-employment projects. It is because it may be spreading outside that we have stopped some projects. In fact, the reason for stopping these projects is what I just said. When we cut off some of our past goals, we are not satisfied with some of the projects that I just said. Then the reason for the adjustment is because That's exactly the reason why we have been reviewing and adjusting in-house development projects because some of the projects were established based on the old standards and based on the new market and new standards, those projects

is very likely to be loss-making when the game came online. That's why we are doing those adjustments and streamlining our project.

After this year's adjustment, we still have some competitive projects in the future market. We will focus our resources on these projects.

After this adjustment of our in-house development gain, we still kept few titles that we think will remain competitive in the current market. We will be very paying close attention to the money invested in and focus our limited resource on the very selective titles who can meet those new standards.

I think this is a correct approach. And I don't think it's just B站 that is doing this. I think the entire industry is doing this. I actually think that this situation is not a bad thing for the gaming industry. Because it marks the return of the gaming industry. That means it has to be a relatively innovative industry.

We think the thing that we're doing with our project adjustment is correct. This movement is not only being done by Bilibili and it's actually across the industry and it's not necessarily a bad thing. We have returned to the fundamental of game developing, which for this industry, the key competitiveness is innovation. And who can really succeed in this industry is the one with the most brilliant idea, the one with the most innovative game making can prevail and succeed.

Finally, what I want to say is In fact, a large number of young and active players are active on Bilibili every day. Bilibili is still the video platform with the highest number of young people gathering in China and the highest content of the game. So I always think that Bilibili has a natural advantage on the game track. Our team actually has a natural sensitivity. I think what we have to do is to turn this advantage into reality.

Lastly, I want to emphasize that on Bilibili platform, there are a large amount of young users, young gamers have been very, very active on our platform. And Bilibili is still the most popular game video content platform in China with a very high content city of young generations. And also for our team, game development team, they also have the sense and understanding of Chinese gamers. What we need to do is realize those advantages and translate that into game developing. Thank you. I'll put in our next question, please.

So that's only one moment for the next question.

Next question comes from the line of Zhang Lei from Bank of America.

Please go ahead.

Hi, Mr. Guan. Good evening. Thank you for accepting my question. My question is mainly about finance. I have seen that the interest rate trend in the past few seasons has been pretty good. Can you help us look at the situation of the 4Q interest rate? And has the goal of reducing losses this year changed? Sense management for taking my questions through mainly regarding margin. Notice that we have a pretty distant improvement in growth margin. And can you give us some outlook for Q4? And how should we look at your full year loss control target you made previously? And any change to our break-even target by 2024? Thank you.

Okay. This is Sam. I will take this question. In Q3, our gross profit grew by 38% year-over-year, and our GPM improved five conservative quarters to 25%. We expect our gross profit margin can continue to improve sequentially in Q4 as there is more revenue contribution from ad revenue. At the same time, We narrowed our non-GAAP operating loss by 51% in Q3, and then we expect we can narrow our non-GAAP operating loss even more in Q4 compared with Q3. That will help us to achieve our initial financial target that to reduce our non-GAAP operating loss by RMB 3 billion in 2023. So we still keep our initial financial goal unchanged. Notably, our operating cash flow has turned positive in Q3 and indicating the business operation has entered into a positive cycle. We expect we can continue to generate positive operating cash flow in Q4. Looking to 2024, we will continue our path of growth, profit improvement, and loss narrowing. On the one hand, we have confidence in the growth of our high-margin business, like ad revenue. which will continue to contribute the growth profit growth, and that will be the main driver to narrow the loss. On the other hand, with some recent structural adjustments, we expect operating expenses, including R&D expenses, to further decline in 2024. Together, I think we will continue to work toward the goal of even. Thank you.

Yeah, thank you, Sam, and management.

Thank you for the questions. And that concludes the question and answer session. Thank you once again for joining Bilibili's third quarter 2023 financial results and business object conference call today. If you have any further questions, please contact Juliet Yang, Bilibili's executive IR director of Bicante Financial Communications. Contact information for IR in both China and the U.S. can be found on today's press release. Thank you and have a great day.