Bilibili Inc.

Good day and welcome to the Bilibili second quarter 2024 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 our business outlook and make forward-looking statements. These comments are based on our predictions and expectations as of today. Actual events or results could differ materially from those mentioned in today's news release and in this discussion due to a number of risks and uncertainties, including those mentioned in our most recent filing with SEC and the Hong Kong Stock Exchange. The non-GAAP financial measures we'll provide are for comparison purposes only. The definition of these measures and our 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 Senior Management are Mr. Ray Chen, Chairman of the Board and Chief Executive Officer, Ms. Kali Lee, Vice Chairwoman of the Board and Chief Operating Officer, and Mr. Sam Fan, Chief Financial Officer. I will now turn the call over to Mr. Fan, who will read the prepared remarks on behalf of Mr. Chen.

Thank you, Julia. Thank you, everyone. for participating in our second quarter 2024 conference call to discuss our financial and operating results. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. We deliver solid second quarter results with accelerated top-line growth, improved margins, and healthy community development. In the second quarter, our total revenues increased by 16% year-over-year to RMB 6.13 billion. Our advertising business led this growth. With ad revenue growing by 30% year-over-year, revenue from our games and value-added services also increased by 13% and 11% year-over-year, respectively. The momentum across our business life is a strong testament to our execution in increasing our commercialization efficiency and unlocking the value of our community. Increased revenues from our higher-margin advertising and game spin lists boosted our gross profit by 49% year-over-year. Gross profit margin rose to 29.9% in the second quarter, up from 23.1% in the same period last year, marking the eighth consecutive quarter of margin improvement. Consequently, We significantly narrowed our adjusted operating loss and adjusted net loss by 69% and 72%, respectively, year-over-year. Moreover, we generated a record RMB 1.75 billion in operating cash flow in the second quarter. Our deferred revenue balance at the end of Q2 also increased by RMB $738 million from the end of Q1. With this progress, we are confident that we can achieve our non-gap breakeven target in the third quarter of this year and continue to improve our profitability thereafter. While we have been accelerating our financial performance, our community continues to thrive. In the second quarter, our DAUs increased by 6% year-over-year, reaching 102 million, and the MAUs grew to 336 million. Our community remains highly engaged, with users spending a daily average of 99 minutes on our platform. As we move into the summer season, we continue to see strong seasonality in terms of user engagement and the retention. On June 26th, we celebrated Bilibili's 15th anniversary. Over the past 15 years, our platform has become a regular destination for nearly 70% of China Gen Z plus population. This journey has brought us tremendous opportunities as these users have become a major consumer force in society. We have seen it in our advertising growth as we enhance our infrastructure to facilitate their involving consumption needs. We have seen it in our game business as we reinvent strategy game to resonate more deeply with the preference of younger audience. As we continue to unlock the value of our community, we remain committed to our founding mission to build a welcoming home for talented creators. and like-minded individuals to connect over shared interests and to satisfy their involving needs for good content and service. With that overview, I would like to discuss our core pillars of content, community, and commercialization in more detail. Beginning with content and community. Our strategy to encourage more high-quality creators to generate content continued to prove beneficial. In the second quarter, average daily video views increased by 18% year-over-year to over 4.8 billion. Our leading content categories, such as games, knowledge, and technology continued to show solid growth in video views, all increasing by over 20% year-over-year. Meanwhile, Users' demand in consumption-related categories also continued to surge in the second quarter. Video views in home appliance and decoration, automotive and fashion and cosmetics all grew by more than 30% compared with the same period a year ago. We continue to provide effective and diversified monetization channels to incentivize our content creators. In the first half of 2024, about 2.1 million content creators received income on Bilibili. Content creators' total income through our ads and vast products increased by 30% year-over-year. Notably, our innovative content-based products such as premium courses and fan-charging programs have been well received by our users. In the first half of 2024, Content creators' total income from these two products increased by over 40% and over 430%, respectively, year-over-year. Looking at our community matrix in the second quarter, our DAU spent an average of 99 minutes with us, compared with 94 minutes in the same period last year, driving up users' total time spent by 11% year-over-year. Monthly interactions increased by 11% year-over-year, exceeding $16.5 billion in the second quarter. By the end of Q2, the number of our official members increased by 13% year-over-year to 243 million, and their 12-month retention rate remained strong at around 80%. Moreover, this July, we heard our signature offline events, Bilibili World and Bilibili MicroLink, once again bringing our community together in Shanghai. More than 250,000 people traveled across the country to participate in the events, leading to a surge in Shanghai's travel-related consumption. The growing enthusiasm at the events showed our unparalleled influence among the young generation. Now, I'd like to talk about our commercialization progress in each of our business lines. First, our advertising business. As our users mature with more disposable income, their commercial value unfolds and they seek more consumption-related content on Bilibili. The demand is there, and all we need to do is to match the right ads with the right user. In the second quarter, we further improved our ad products and infrastructure to increase our ad efficiency. Specifically, we upgraded our ad placement system, featuring user-friendly placement tools and enhanced conversion capabilities, attracting and retaining more advertisers on Bilibili. In the first half of the year, the number of advertisers on our platform increased by over 50% year-over-year. Moreover, we continued to invest and improve our ad modeling capabilities to better understand our users' consumption behaviors and preferences, which enabled us to further enhance our ad matching efficiency. Meanwhile, we incorporated more native video style ad content, allowing us to expand ad load while maintaining user experience. We plan to further advance this initiative in the following quarters and help our advertisers create ad materials more easily and place advertisements more automatically. Industry-wise, our top five advertising verticals were mobile games, e-commerce, digital products and home appliance, food and privilege and automotive in the second quarter. Our anchor verticals continue to deliver strong performance. During the 6-1-A Shopping Festival, we not only secured more ad budgets from e-commerce platforms, but also directly from online merchants in different verticals. Total GMV from video and live commerce increased by over 140% year-over-year during the period. Besides our leading verticals, we also saw incremental ad revenues from emerging verticals. In the second quarter, ad revenue from internet services, AI, and education all increased meaningfully. Turning to our game business, game revenues resumed growth by 13% year-over-year in the second quarter to be 1.01 billion. led by the excellent performance of our recently launched strategy game, SANGUO MOU DING JIAN XIA, SANGMOU, and the ACG game, ARTICRAFTER. Our Lexi titles also contributed steady game revenues and demonstrated remarkable longevity. As FGO celebrated its eighth anniversary, it returned to the top 10 on the iOS game grossing chart in July. As for Azure Online, monthly active users reached a new peak in June with the celebration of its seven-year anniversary. This trend strengthened our commitment to the long-term operation of high-quality games. We were delighted to see our first strategy game, Sunmo, become an immediate blockbuster. On the first day of its launch, it ranked in the top three on the iOS game growth chart attracting millions of gamers to the Three Kingdoms battlefield. Sammo also set a new record in our operating history, being the farthest title that exceeds RMB 1 billion game-grossing mark. With the launch of the second game season on August 3rd, Sammo returned to the top three on the iOS game-grossing chart. The decent size of the SLG market The early success of Sunmo and the long lifecycle nature of SLG games give us confidence that it will become one of our flagship games with enduring longevity. Over the years, our community has expanded exponentially and so has our gamer base. Sunmo's success marks our breakthrough in our general diversification strategy and shows the vast potential of our game business. We will continue leveraging our leading role as a top gaming community and capitalization our significant opportunities to reinvent games for the new generation of gamers. Turning to our vast business, revenues from vast business increased by 11% year-over-year to RMB 2.57 billion. We continue to add more live broadcasting content offerings. reinforcing the synergies between our live broadcasting and the PUGB ecosystem to better cater to user diverse interests. We will also further explore opportunities in our other vast business as our Gen Z Plus users have demonstrated an increasing willingness to directly pay for the content they love. Our premium members continue to increase, reaching 22.3 million by the end of second quarter. with over 80% of them subscribing annually or under auto-renew packages, showing their continued loyalty and trust in our platform. Users spending our other best products has grown rapidly in the second quarter, particularly in premium courses, our fan-charging program, and avatar decoration. We expect these products to open more monetization potential across our massive POGV content universe in the future. We believe good content and community can bring people together, and the value of our users is just starting to show its potential. Our community is thriving, and our solid second quarter results place us just one step away from profitability. We are excited to move forward and take Bilibili to the next level. This concludes Mr. Chen's remarks. I will now provide a brief overview of our financial results for the second quarter of 2024. For a closer look at our financial results, we encourage you to refer our press release issued earlier today. As a reminder, all amounts are in RMB unless otherwise noted. In the second quarter, we further advance our commercialization capabilities delivering accelerated year-over-year revenue growth across our core business. At the same time, we continued to expand our margins and considerably narrowed our losses. All of these financial improvements were founded in our top-line growth with increased efficiency. Total revenues for the second quarter were $6.13 billion, up 16% year-over-year. Our total revenues breakdown by revenue stream for Q2 was approximately 42% VAT, 33% advertising, 17% mobile games, and 8% for our IP directives and other business. Our cost of revenues increased by 5% year-over-year to RMB 4.3 billion in the second quarter, while our gross profit rose 49% year-over-year to RMB 1.8 billion. Our gross profit margin reached 29.9% in Q2 up from 23.1% in the same period last year. Our total operating expenses were down 3% year-over-year to RMB 2.4 billion in the second quarter. Sales and marketing expenses increased by 13% year-over-year to RMB 1 billion, mainly due to increased marketing expenses for the new game launch. G&E expenses were RMB $488 million, down 10% year-over-year. R&D expenses were RMB $895 million, down 15% year-over-year, both related to reduced HECOM expenses. We narrowed our adjusted operating loss and adjusted net loss to RMB $284 million and RMB $271 million in the second quarter. reducing our losses by 69% and 72% year-over-year, respectively. Our adjusted net loss ratio in the second quarter comes down to 4% from 18% in the same period last year ago. Cash flow-wise, we generated a record RMB 1.75 billion in positive operating cash flow in the second quarter, and a total of RMB 2.4 billion in positive operating cash flow in the first half of the year. As I mentioned earlier, driven by the strong performances from our GAMS and Albinus, our deferred revenue balance at the end of Q2 also increased by RMB 738 million from the end of Q1, proving a solid path to achieve our non-GAAP breakeven target next quarter and the sustainable profitability thereafter. As of June 30, 2024, We had a cash-to-cash equivalence, time deposits, and shorting investments of RMB 13.9 billion, or US dollar 1.9 billion. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.