Bilibili Inc.
Q4 2019 Earnings Call Transcript

Published: 17 Mar 2020

[Operator:]

Ladies and gentlemen, good day, and welcome to the Bilibili 2019 Fourth Quarter and Full Year Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Juliet Yang, Senior Director of Investor Relations. Please go ahead.

[Juliet Yang:]

Thank you, operator. Please note, the discussion today will contain forward-looking statements relating to the company's future performances and are intended to qualify the Safe Harbor from liability, as established by the U.S. Private Securities Litigation Reform Act. Such statements are not guarantees of future performances and are subject to certain risks and uncertainties, assumptions and other factors. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's press release and this discussion. A general discussion of the risk factors that could affect Bilibili's business and financial results is included in certain filings of the company with the Securities and Exchange Commission. The company does not undertake any obligation to update forward-looking information, except as required by law.

[Sam Fan:]

Thank you, Juliet. Thank you, everyone, for participating in our fourth quarter and full year 2019 earnings conference call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. 2019 was a transformative year for Bilibili, with remarkable and diverse growth to our content and user base. We significantly enhanced our entertainment ecosystem and expanded our platform’s offerings beyond ACGs. While we remain the leader in online entertainment for Generation Z users, our platform is also beginning to be recognized as a mass market product with offerings that appeal to people across different generations. Meanwhile, we continue to foster friendly, active, and sticky community with high engagement levels and retention rates making Bilibili an extremely unique and a competitive player in China's fast-growing entertainment industry. During 2019, we affirmed you the growth as our key strategic focus and raised our MAU target for the next two years to RMB 220 million by 2021. I'm pleased to say we are on the right track to meet this exciting goal. We closed the year on a high note with our fourth quarter results forming a solid foundation for our two-year growth plan. MAUs grew by 40% year-over-year, reaching a record 130 million users compared with 93 million in the fourth quarter 2018. Mobile MAUs grew at an even faster pace of 46% year-over-year, reaching 116 million users by the end of Q4. At the same time, community engagement is at all-time high. Our DAUs increased by 41% year-over-year to 38 million, higher than our MAU growth rate, and users are spending an average of 77 minutes on our platform per day excluding gameplay time. These statistics once again demonstrate the high-quality growth we always aim to deliver.

[Sam Fan:]

That concludes Mr. Chen's remarks and I will now provide a brief overview of our financial results for the 2019 fourth quarter and full year. Our total net revenue increased by 74% year-over-year to RMB2 billion, exceeding the high end of our guidance. Our non-GAAP revenue made up nearly 57% of our total revenue in the fourth quarter, up from 38% in the same period of 2018. With more than half of our revenues coming from multiple sources, we are pleased with our commercialization progress and the implications of this diversity. We are also converting more and more online traffic to paying users. The average number of monthly paying users increased by 100% year-over-year, reaching 8.8 million in the fourth quarter. Cost of revenue increased by 68% year-over-year to RMB 1.6 billion. Revenue sharing cost, a key component of cost of revenues, was RMB 705 million, a 63% increase from the same period in 2018. Gross profit increased by 102% year-over-year to RMB 398 million. We are also starting to see operating leverage from our diversified revenue streams. With more revenue contribution from our higher-margin business, including advertising and cooperated games as well as additional income from premium users, our gross profit margin steady improved throughout 2019, reaching 19.8% in the fourth quarter. Total operating expenses increased to RMB 818 million, up 68% from the same period in 2018. Selling and marketing expenses were RMB 413 million, representing a 127% increase year-over-year. The increase was primarily attributable to the increased channel and marketing expenses associated with Bilibili ad and brand, including promotional activities for offline events, the 2020 New Year's Eve Gala event, for example, as well as promotional expenses for our mobile games. The increase was also attributed to the increased headcount in sales and marketing personnel and the increasing fulfillment costs associated with our e-commerce program. G&A expenses were RMB 160 million, representing a 6% increase year-over-year. R&D expenses were RMB 245 million, representing a 60% increase year-over-year. The increase was primarily due to increased headcount in R&R personnel and increased share-based competition costs. Net loss was RMB 387 million for the fourth quarter of 2019 compared with RMB 191 million in the same period of 2018. Adjusted net loss, which are non-GAAP measures that exclude share-based compensation expenses and amortization expenses related to intangible assets acquired through business acquisitions, was RMB 337 million compared with RMB 152 million in the same period of 2018. Basic and diluted net loss per share were RMB 1.17. Adjusted basic and diluted net loss per share were RMB 1.01. For the full year of 2019, total revenue increased by 64% to RMB 6.8 billion. Revenue from mobile games increased 23% to RMB 3.6 billion. Revenue from live broadcasting and VAS increased 180% to RMB 1.6 billion. Revenues from advertising increased 76% to RMB 817 million. Revenue from e-commerce and other increased 403% to RMB 722 million. Gross profit increased 39% to RMB 1.2 billion. Net loss for 2019 was RMB 1.3 billion compared to RMB 565 million in 2018. Adjusted net loss for 2019 was RMB 1.1 billion compared to RMB 377 million in 2018. Basic diluted net loss per share for 2019 was RMB 3.99 or US$0.57 compared to RMB 2.64 in 2018. Adjusted basic diluted net loss per share were RMB 3.30 or US$0.47 compared to RMB 1.84 in 2018. As of December 31, 2019 with a cash and cash equivalents, term deposits as well as short-term investments of RMB 8.1 billion compared to RMB 5.2 billion as of December 31, 2018. To further grow our business, we plan to improve our monetization by leveraging our considerable and growing traffic. We also see benefit in further expanding our diverse revenue streams and continue to improve revenue contribution per MAU. Longer term, we believe our monetization efforts, high-paying user scale and the conversion rate will yield an improved bottom line. With that in mind, we are currently projecting net revenues for the first quarter of 2020 to be between RMB 2.15 billion and RMB 2.2 billion. The above outlook is based on the current market conditions and reflects the company's preliminary estimates, which are all subject to change, particularly in light of the uncertainties related to how coronavirus developments. Thank you for your attention. We would like now to open the call to your questions. Operator, please go ahead.

[Operator:]

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question today comes from the line of Lei Zhang from Bank of America. Please go ahead.

[Lei Zhang:]

My first question is about recent Coronavirus outbreak. Wondering whether management could share your thoughts on how the outbreak may impact our business? Related to that, can you give us more color on the user trend in fourth quarter, especially after people are back to work and if any user slowing down? And how should we look at our full year user target? Thank you.

[Rui Chen:]

[Juliet Yang:]

So, taking the virus situation under consideration, we are currently projecting our Q1 total net revenue to be between CNY 2.15 billion to CNY 2.2 billion and which has considerable growth quarter-over-quarter and year-over-year. And given that we have multiple business lines -- different business lines, e-commerce because due to the logistic delays, there will be some impact related to the -- how much we can book the e-commerce revenue in the first quarter. However, compared to other business that's more related to our traffic growth such as live broadcasting and games and -- we do see some positive impacts of the extended traffic. Overall, in general, we don't see much of an impact to our overall business.

[Rui Chen:]

[Juliet Yang:]

So given the extended holiday, people are staying at home for over a month, and Bilibili has become many people's first choice for online entertainment consumption, and we've seen so far either it is user traffic, user engagement, as well as time spent has been beyond our expectation. So overall, this trend is quite positive.

[Rui Chen:]

[Juliet Yang:]

So, regarding your question about whether we see a decline in users after people are now going back to work, the answer is that user growth is our primary business focus for 2020, and we don’t rely on incidence or occasions like the Coronavirus outbreak. We do have a designated -- through -- thorough plan throughout the years to help us to achieve a steady user growth.

[Rui Chen:]

[Juliet Yang:]

So, after people are going back to work for sure, the growth rate won't be as high as when people are staying at home, but it won't be a drastic up and down.

[Lei Zhang:]

Okay. Thank you. Congrats on the results today.

[Operator:]

Your next question comes from the line of Wendy Chen from Goldman Sachs. Please go ahead.

[Wendy Chen:]

Thanks management for taking my questions. And my question is about the user growth outlook. As we have achieved the 130 million MAU target this year, I'm wondering what's management's updated view on our user growth target for the full year 2020. And as we are targeting with mass market appeal this year, what is our outlook for our user growth addressable market for the longer term? Thanks very much.

[Rui Chen:]

[Juliet Yang:]

So, as we communicated with the market before that, we have setup our user growth goal for 2020 to be 180 million and 220 million for 2021. And we have done a lot of – we have conducted a lot of efforts to help us to achieve this goal. And so far, it all looks like the progress is well on track.

[Rui Chen:]

[Juliet Yang:]

So while we are quite optimistic about our user growth plans, at the same time, we also really value the quality of that growth. And the past historical data also suggests even though that we are on a very fast track of user growth, we have maintained a high-quality of user growth as well as a very tight community environment. Our users' time spent retention rate as well as the interaction levels have all been quite positive, sometimes all faster than our MAU growth, indicating the high quality of our user growth. So, this is the standard we are hoping to continue to maintain throughout the year.

[Rui Chen:]

[Juliet Yang:]

So at the same time, we are also focusing on improving our commercialization capabilities. So there are several metrics that we've seen -- very positive trends from the paying user conversion rate, as well as our traffic related business such as our advertisement revenue growth. They are all quite very clearer positive are paying user growth more than doubled our advertisement revenue grew, 81% year-on-year. So all this metrics are suggesting, we're also making a very good progress on improving our commercialization capability.

[Rui Chen:]

[Juliet Yang:]

So in summary that we are quite confident that too, while maintaining fast user growth trend, we'll continue to maintain a high quality of that growth, maintain a very friendly and tight community environment while simultaneously improve our commercialization capability.

[Operator:]

Your next question comes from the line of Alex Liu from China Renaissance. Please go ahead.

[Alex Liu:]

So, my question is on advertising business. We note that fourth quarter advertising growth is very robust and also the first quarter guidance is also very solid. Could the management share some color on our advertising business performance in first quarter? And also for full year 2020, could you share some updates on advertising business new initiative?

[Carly Li:]

[Juliet Yang:]

So historically, Bilibili has been very strong in terms of converting customer -- converting to be related business. And we've seen a very strong conversion in terms of many consumptions including our games, live broadcasting and advertisement business. So we do achieve very solid growth across all business lines in 2029 and we feel quite confident that will -- this business has great potential. And during the fourth quarter, even under this challenging -- very challenging macro environment, we were still able to deliver 81% year-on-year advertisement growth.

[Carly Li:]

[Juliet Yang:]

So, as our brand awareness continues to grow, we have made quite big of impression among our advertisers from vertical content platform to a must-invest, must-have channels to reach young audiences. For example, this year, we've seen some very clear trends that Bilibili has become the first choice for audiences, for example, a lot of new product launches plus online conferences. And all of that is -- we've seen that the advertisement -- advertisers' budget is shifting with the movement of our users.

[Carly Li:]

[Juliet Yang:]

So, starting from Q1, we will adjust and continue to improve our advertisement overall strategy as well as pricing and efficiencies to achieve sustainable growth.

[Carly Li:]

[Juliet Yang:]

So, third and quite importantly is on the technology front, we'll continue to invest to improve and revolutionize our algorithms efficiencies to improve our performance-based advertisement effectiveness and improve our click-through ratio.

[Carly Li:]

[Juliet Yang:]

So, your question regarding our collaboration with Alibaba. So in 2019, we have established quite a lot of new projects and collaborations during Double 11 and Double 12 shopping and also exclusively sponsored Bilibili's New Year's gala, which the overall effect has exceeded more or so our expectation. So, so far, we think that partnership between Alibaba has met or even exceeded our previous expectations, and we really look forward to deepen our relationship with Alibaba's overall e-commerce ecosystem in 2020.

[Carly Li:]

[Juliet Yang:]

So, we actually have developed a whole strategy of how we can better collaborate Bilibili's ecosystem with Alibaba's ecosystem in terms of integrated marketing campaign that includes the brand campaign, that increase the brand awareness and to influence users' purchasing decision through native ads and complete the transaction through performance-based ads. In this strategy, we can copy and paste and replicate that with many new advertisers in 2020. And we believe we have a lot of potentials to further replicate the success stories between Alibaba and Bilibili to many other new advertisers.

[Carly Li:]

[Juliet Yang:]

So, as Rui Chen mentioned earlier that 2020's primary focus of our business as to grow our users. And while we do so, they will -- the increased traffic will also serve as fuels for our advertisement business. So we are quite confident that in Q1 and 2020, our overall advertisement business will have a very good growth trajectory.

[Operator:]

Your next question comes from the line of Thomas Chong from Jefferies. Please go ahead.

[Thomas Chong:]

Thanks management for taking my questions. I have two questions. My first question is about the GP margin trend. Given the solid GP margin over the past three quarters, can management comment about how we should think about the GP margin outlook in 2020? And my second question is about the gala event that we host very successful earlier this year. Can management comment about the positive impact to our platform after the success? Thank you.

[Sam Fan:]

Okay, Thomas. I will take your first question and Rui will take – will comment on your second question. Yeah, you're right. Our gross profit margin has recorded steady improvements throughout 2019 from like 13.8% in Q1 to like 18.1% in Q4. In the future, we still see some room to further leverage between our high-paying ratio and to increase the revenue per MAU to further improve the gross profit margin that leverage will come from the cost component, like brand awareness cost as well as the revenue sharing cost. So we will work on that, and you will see that in the coming quarters.

[Carly Li:]

[Juliet Yang:]

So the success of the gala, well, the gala itself is part of our user growth plan as well as part of our brand campaign. And we don't think this is an isolated event that Bilibili New Year's Gala is a success. It actually is a testimony of how Bilibili understand young people's interest. And as we accumulate our understanding for the past 10 years, this has made a material impact in the mainstream IPOs ideas.

[Carly Li:]

[Juliet Yang:]

So Bilibili this – this gala is a landmark event as Bilibili moved into the realms of mass market appeal. And the success of the gala actually attract -- the content of the gala actually attract many users from different background and different generations and make them get to know Bilibili from their perspective from what they have – the perspective or content verticals that they are familiar with. And this is quite – we would think this is a quite eventful campaign that made the Bilibili brand accessible, much accessible to wider generations and audiences.

[Carly Li:]

[Juliet Yang:]

So far, the playback of the event has been viewed over 90 million times. And we have accumulated 5 billion media exposures and that we think it has four major points that will impact our business.

[Carly Li:]

[Juliet Yang:]

So first of all, it definitely laid a very solid foundation for our 2020 overall user growth plans. And second of all is, further increased our brand awareness among users and make them to perceive a little bit more clear about what Bilibili is and what Bilibili has to offer. And thirdly, as we mentioned earlier on the advertisement front it definitely also has a very positive impact. Like we said Tencent sponsorship, the overall effect has exceeded their expectations and also made a very good example of how Bilibili's events and campaigns can influence and reach much wide audiences groups. And last but not least is, once again, it's a strong testament of how Bilibili has the determination and ability to produce high-quality content and will continue -- and well committed to continue to produce more high-quality content.

[Operator:]

The next question comes from the line of Jialong Shi from Nomura. Please go ahead.

[Jialong Shi:]

Hi good morning Rui, Sam and Carly. Thanks for taking my question. . My question for management is about the competition landscape. We saw some of Bilibili's peers, Chinese Internet peers are talking about ramping up investments this year in either anime or PUGV content. We understand these peers – this move by peers may show the huge potential in this market. But the entry of these newcomers may also fewer the competition in this segment. So my questions are two. First of all, I just wonder how management think of the potential impacts it may have on the company's assets to retain talented content creators and the audience? Will Bilibili at certain point be forced to pay more to some of the top content creators in order to retain them? And secondly, what are the company's strategies to maintain fast user growth in a more competitive environment? Is there any risk that Bilibili may have to spend more in marketing dollars to hit the user growth target?

[Rui Chen:]

[Juliet Yang:]

So as regards, the overall video industry, actually it's a fast-growing and a very big market. According to third-party research data that the current video user has already reached 750 million in China, and we think as the adoption of 5G technology and the revolution of hardware and infrastructure, I'm projecting that overall 1 billion users can grow to 800 million or 900 million in the next few years.

[Rui Chen:]

[Juliet Yang:]

So as a matter of fact, video as an industry vertical on the Internet space is actually one of the largest verticals. And for the past few years, you can – you must have witnessed many new players – many players in the video industry grow quite significantly, and that has also a very direct relation to the expansion of the market. And we don't believe one or two new additional players entering this market will make a material impact or difference from this growth trajectory.

[Rui Chen:]

[Juliet Yang:]

Okay. So a lot of people have asked that for the past two years, how do impact the overall industry? But as a matter of fact, we are able to maintain a fast growth while gaining there market share. Many people would probably argue that it's the different -- there's a different lens in terms of short video and long-form video, but we believe we are actually the player who gives definition of PUGVs, and we have the most experience in terms of PUGVs.

[Rui Chen:]

[Juliet Yang:]

So we are -- we have been putting PUGC as our primary business model for at least five years. And for the past five years, we have gained a lot of experience. And actually, we kind of feel alone in this track, and now we have more players starting to pay more attention on this business model. We believe this is another test -- a different perspective on another side of the story, which means this track has great potential to grow.

[Rui Chen:]

[Juliet Yang:]

And this business model requires unique expertise in terms of operation as well as running a platform. So for the newcomers, I think there's going to be a learning -- at least a learning curve for them and won't yield result in short terms.

[Rui Chen:]

[Juliet Yang:]

So, as for your question about the competitive cost related to more player joining in these verticals, we believe for this industry, we have long passed the phase that people have to burn cash to fiber content or KOLs. This is -- we have already entered a phase that that we compete with each other in terms of the overall industry layout, the business operation capabilities, as well as whether content creators are able to achieve their career goals on our platform to able to grow their traffic on our platform. So, it won't have a significant impact in terms of single cost, whether it's content or sales and marketing.

[Operator:]

And that concludes the question-and-answer session. I would like to turn the conference back over to management for any additional or closing remarks.

[Juliet Yang:]

Well, thank you once again for joining us today. If you have any further questions, please contact myself, Juliet Yang, Bilibili's Senior IR Director or TPG Investor Relations. Our contact information for IR in both China and U.S. can be found we are able to in today's press release. Have a great day.