Bilibili Inc.
Q4 2018 Earnings Call Transcript

Published: 28 Feb 2019

[Operator:]

Good day, and welcome to the Bilibili 2018 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 that discussion today will contain forward-looking statements relating to the company's future performance and are intended to qualify the safe harbor from liability as established by the U.S. Private Securities and Litigation Reform Act. Such statements are not guarantees of future performance 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 the certain filings of the company with the Securities and Exchange Commission. The company does not undertake any obligation to update this forward-looking information, except as required by law. During today's call, management will also discuss certain non-GAAP financial measures for comparison purpose only. For a definition of non-GAAP financial measures and a reconciliation of GAAP to non-GAAP financial measures, please see the 2018 fourth quarter and full year financial results news release issued earlier today. As a reminder, this conference call is being recorded. In addition, an investor presentation and a webcast replay of this conference call will be available on Bilibili Investor Relation's website at ir.bilibili.com. Joining us today on the call from Bilibili senior management are Mr. Rui Chen, Chairman of the Board and Chief Executive Officer; Ms. Carly Li, 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 lead the prepared remarks on behalf of Mr. Chen.

[Sam Fan:]

Thank you, Juliet, and thank you, everyone, for participating in today's earnings call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. 2018 was an exciting year for Bilibili as we made great strides across our business. In March, we successfully completed our IPO, and throughout the year, we continued to build on that success and grow each of our core divisions. We added massive amounts of new diverse content through our robust Professional User Generated Video or PUGV ecosystem as well as entered a number of new cooperation agreements. Our ever growing content supports our expanding community. By the end of the year, our MAUs grew to record level of 92.8 million. Importantly, we deepened the level of connectivity within our community and enhanced our monetization capabilities. By the end of 2018, we had increased our revenue by 67% to RMB4.1 billion, and the number of paying users contribute from 1.1 million to 4.4 million in the last 12 months. The fourth quarter was an extension of this momentum, and the total net revenues increased 57% year-over-year to RMB1.2 billion, once again surpassing our expectations and beating the high end of our guidance. During the fourth quarter, we further grew our robust compilation of high-quality content through our PUGVs. As we announced during the quarter, we entered a strategic agreement with market giants Tencent and Alibaba, which considerably strengthened our capacity in anime, in mobile games and commercialization. Our extensive and growing library of content continues to attract young people to our community, generating substantial user growth. In the fourth quarter, the number of monthly active users grew by 29% year-over-year, reaching 92.8 million. Our mobile monthly active users grow even faster by 37% year-over-year to 79.5 million in the fourth quarter. Our platform's exceptional user growth and increased engagement levels are the testament to our unparalleled community. In the fourth quarter, our users spent a daily average of 78 minutes on our platform, excluding time spent playing our mobile games. This is up five minutes compared to the same period last year, while increasingly large number of new users also joined in our platform. In 2018, the most popular content verticals were entertainment, lifestyle, games, anime and technology. Within our massive user base, we have a unit called user group official member. They pride themselves on passing our community entrance exam and exhibit much more loyal and engaged user behavior compared to nonofficial members. They are also considerably more inclined to pay for Bilibili premium content, and their 12-month retention rate is over 80%. By the end of 2018, our official members, once again, outpaced our MAU growth, increasing by 44% year-over-year to 45 million. Through our entertainment ecosystem, our video content creations continued to be dominated by PUGVs. Looking at the fourth quarter specifically, approximately 89% of our viewed videos came from PUGVs. Finding ways to support this important constituency was one of our primary goals in 2018. Today, our submission progress has been more streamlined with technical updates on mobile content submission and streaming. Our cash incentive program had over 100,000 enrollments, further activating and encouraging continued content creation. In the fourth quarter, we had on average of 570,000 active content creators uploading 1.7 million video monthly, up 143% and 148%, respectively, compared to the same period last year. In addition, we hosted Bilibili Top 100 Content Creators Awards Ceremony in January 2019, where we celebrated outstanding achievement of leading content creators in various categories. We will continue to improve our platform design competencies and expand our commercialization capabilities to help our content creator shine even brighter. In addition to our diverse PUGVs, our premium licensed content anime, variety shows and documentaries continue to thrill our community. As we further our leadership in overseas anime offerings, we are also expanding our footprint in domestic anime. In December, we hosted a Made by Bilibili press conference, where we released over 20 Bilibili-produced domestic animation shows. Furthermore, our self-produced variety show, Storyman 2, and annual Bilibili New Year Gala landed instant success among the youngster generations following their releases. Building partnership with market leaders was also one of the important ways we extended our content offerings and improved our commercialization capabilities. In early October, we announced Tencent's equity investment of $370 million and our subsequent partnership. Under our agreement, both Bilibili and Tencent will exchange, coproduce and jointly invest in anime content as well as expand our partnership in mobile games operations. As of the end of February 2019, we have already exchanged a number of domestic animation copyrights and more are planned for the rest of the year. We are also jointly working on certain new anime-related projects, aiming to deliver more high-quality content to anime lovers. Furthermore, in December 2018, we entered into a partnership with Taobao, China's largest mobile commerce destination under Alibaba for content driven e-commerce and the commercialization of Bilibili's IP assets. Leveraging Taobao's gigantic platform and expertise in e-commerce, we expected to further help our content creators to realize and improve their commercial values while building a more virtual content community and commercialization-focused ecosystem. We are working closely with Taobao. And in the coming months, we expect to introduce the first batch of top content creators to promote merchandise on both platforms. Our finger remains on the first of the online entertainment industry, particularly through our core Generation Z demographic and their continued enthusiasm for ACG content. In November, we considerably strengthened our fundamental competence in ACG with the launch of our new Bilibili Comic app. Rounding out our offerings and fortifying our position as a leader in ACG, we are rapidly accumulating exciting comic content. In December, we also acquired assets on NetEase comic division to further build our complementary suite for premium licensed content. We will continue to invest in ACG content to satisfy the growing demand for our eager community. As we discussed in the past, technology is the cornerstone of our business. We continue to improve our product design and AI power to connect users and grow our community. Over 70% of our video views are now generated by our smart recommendation system, and over 1/3 of MAUs visited Bilibili Moments, a social interactive function that allows users to interact and engage with content creators and like-minded friends in the community. Based on these fundamentals -- functionalities and improved recommendation powers, our users are building deeper connections and engaging more with the platform and each other than ever before. In the fourth quarter, we saw exciting participation levels with 476 million daily views and 1 billion monthly interactions through bullet charts, comments, likes and Bilibili Moments posts, up 107% and 298% year-over-year, respectively. These unique interactions are essential to our success and one of the ways that we continue to build our loyal offerings. With that overview on content community, I'd like to take a few moments to review our commercialization progress. Revenues from mobile games grew 50% year-over-year to RMB713 million in the fourth quarter of 2018 or $104 million, led primarily Fate/Grand Order, or FGO. The game pervasive popularity continued throughout the fourth quarter. And users responded quite favorably to the release of the major content update FGO Chapter 2.0 around the 2019 Chinese New Year. Additionally, we released new titles, including Son of the Time [ph] in November, an exciting ACG-themed RPG based on well-known IP, which has been gaining popularity among co-users. For our jointly operated games. In the fourth quarter, we published several titles, including Naruto Online from Tencent and Night Falls

[Operator:]

[Operator Instructions]. And our first question comes from the line of Thomas Chong from Crédit Suisse.

[Thomas Chong:]

I have two questions. My first question is about e-commerce strategy, our cooperation with Taobao. Can management talk about more details about how we should think about this business line in 2019? And any financial implications to the top line and the bottom line? And my second question is about our user growth. Given our strong user growth this quarter, can management share our thoughts in 2019 and 2020?

[Rui Chen:]

[Foreign Language].

[Juliet Yang:]

Thank you, Thomas, for your question. I will translate Mr. Chen's answer. The cooperation with Taobao we announced in December last year, the cooperation mainly include content-driven e-commerce business and commercialization of Bilibili intellectual IP assets. For example, to Bilibili content creators, we'll register and operate a number of accounts on Taobao and promote merchandise by producing content on creative and interactive format on both platforms in a way to increase their commercial values. As for the Bilibili's IP assets, we'll connect both the front and the back end of the database and to improve our commercialization of our IP assets. And Taobao will provide Bilibili with e-commerce technical support to ensure a smooth and more efficient user experience. Currently, our collaboration with Taobao with regarding the content creators are progressing very smoothly. We are actually in a process of introducing our first batch of content creator who has over 1 million followers to set up -- to be set up in Taobao. The collaboration between Bilibili and Taobao is more of a union of two ecosystems, the Bilibili's content ecosystem as well as Taobao's commercial system. As the two ecosystem united, we see a lot of synergy and commercialization opportunities. In the future, there will be multiple ways for us to work together. That includes advertising opportunity related to e-commerce and for our content creators to better monetize their traffic. So Thomas, with regarding the user expansion plan Mr. Chen has discussed in the past, in 2019, our user goal is to reach a peak MAU around 110 million to 120 million and to reach 140 million to 150 million in 2020. Currently, we are well on track to deliver that goal.

[Operator:]

And our next question comes from the line of Alex Yao from JPMorgan.

[Alex Yao:]

So my first question is to follow up Thomas' question on the partnership with Alibaba. Given the Alibaba partnership, how should we think about your revenue mix change over the next 2 to 3 years? Then the second question is on the user acquisition costs to achieve our target of 2019 MAU. To be able to achieve that target, what's your user acquisition strategy? And how should we think about your sales marketing budget over the coming quarters?

[Rui Chen:]

[Foreign Language]

[Juliet Yang:]

In the past, we have made revenue structure forecasts. From a 3-year horizon, we projected by then we will have about a 50-50 revenue split, 50% games and 50% nongames. Based on our current business plans, this goal is still on track. Okay. Mr. Chen added, as he mentioned earlier, that the collaboration with Taobao is beyond just on the revenue lines, is more of a union of two ecosystems. This will, for one, definitely help on our commercial advertising business which will help us to grow faster and more healthier. More importantly, they will also help us to build a stronger ecosystem with our content creators to better connect the user, the content and the merchandise. In a way, it's fundamental baseline to reinforce our powers to generate revenue more healthily. Okay. So the core competency in our commercial ability, one is to grow in the healthy way. Second is more sustainable way. It probably won't immediately show on the P&L but will help us not only not hurting our user experience but finding and providing more right content and right consumption products to our users and to help us to grow in the longer run. As for the sustainability, we think our revenue growth will be a very healthy longer-term sustainable growth. So the fourth quarter user growth as well as the full year user growth is in line with our initial projections.

[Carly Li:]

[Foreign Language]

[Juliet Yang:]

The key driving force of that user growth is mainly driven by our content, specifically in PUGV and our OGV content as well as the stickiness and engagement level of our community. At the same time, based on our experience and advantage of our content offering, we'll also actively to try to attract user from outside of our community to come to Bilibili. In 2018, our user acquisition strategy has gained a very deep experience in terms of evaluate the quality of the new user in terms of level of engagement and level of retention. So based on our internal analysis, we see the new user who come in, in 2018, their conversion to registered user and their conversion to paying user, the level is much higher compared to the same period last -- in 2017. That results prove -- is a proven -- is a proof -- strong improvement of our 2018 user acquisition strategy. Looking into 2019, we'll continue to focus on the quality of new user and focus on the key matrix such as their engagement level, their conversion to paying users and to improve our user acquisition policy. So all in all, in 2018, we'll considerably add some budget as in terms of absolute dollar amount in user acquisition.

[Sam Fan:]

Yes. Let me have some input for that. Actually, there were three cost component in our selling and marketing expenses. That's the promotion expenses for our online game and the quota to acquire the new users and as well as the personnel costs related to our commercial salesperson -- sales team person. So as we mentioned that there will be more games to be released in this year, and we will enlarge our investment in the user acquisition. We forecast that, overall, the selling expenses will account in around 60% of the total revenues, but the number will be -- the percent will be varied through the different kind of quarters. Like in Q1, Q3, there will be higher percentage. In Q2 and Q4, they will be a little bit lower.

[Operator:]

And our next question comes from the line of Alex Poon from Morgan Stanley.

[Alex Poon:]

I'll translate my questions. My first question is regarding MAU growth. Could you give us some more color on where these new users will come from, whether they are students or nonstudents or come from higher tier cities, lower tier cities, age demographics, whether they are game streaming users or they are -- they watch to win and they don't go to win anymore or they come from Taobao because of the new partnership? My second question is regarding gross margin improvement. In the next two years, assuming fourth quarter, assuming the revenue mix is already 50-50 between games and nongame, what the gross margin would be today? And for most of the business segments, you have a quite high revenue share for games, advertising and live streaming. And in the next 2, 3 years, what are the plans to increase the gross margin of each of these businesses?

[Rui Chen:]

[Foreign Language]

[Juliet Yang:]

So the driving force of our user growth is through content. We use content to attract users and use our community to retain users. We do not solely rely on pure traffic acquisition. So we have been relying on this model for the past years, and we'll be relying on this model in the future -- in the futures. That -- the key reason behind our user growth is we are a content-driven business model. As we expand our content categories and improve our content qualities, we will be attracting more and more users who are interested in those categories. And because our strong community features that our own users are -- have much higher retention level compared to other platforms, that's why we are able to continue to grow in the future. So I think, for the young generations in China, their demand for content will only grow stronger, and their demand for the quality of content is another way of consumption operate. So that's why more and more young people will become our users. So based on the second half of 2018 new user profile analysis, we see both first and second tier city as well as third and fourth tier, fifth tier city. They are both growing. The user who are coming from third tier and below are growing faster than the first and second tier city. We think this trend will continue in the next few years.

[Sam Fan:]

Okay, let me take the question about the gross profit margin. Actually, if you look at the revenue sharing costs that we already disclosed, in Q4, that number is around 78% of the revenues. So that means that we don't pay too much to those kind of users. For the individual business segments like games, actually, for exclusive games, the gross profit margin is quite stable, like 55% for exclusive game license. Therefore, the whole operation model, the -- we don't share any profit to third parties. So that means that the GP margin will be around 100%. And for the live broadcasting, currently, the gross profit is not that high, but actually, if you count the -- our subscription membership revenues, the overall margin is still reasonable. So we will not like to calculate gross profit margin in like just to look at 1 quarter or 2 quarter numbers. We will keep investing our Comic business so that we will incur more content cost for our comic, and we will also invest in different areas like virtual idol, Luo Tianyi, that will help us to grow our community. So in the short term, like 1 or 2 quarters, the gross profit margin may be -- have some fluctuations. You already saw that in Q3 and Q4. Also, there might be some pressure in Q1. But in the long run, I think the investment for today is to have their value to help us to achieve more stabilized sales mix. At that time, we foresee that when normalized, our gross profit margin, where we have 50% revenue from games and 30% from advertising and 20% from VAS, that means the gross profit margin will be around 40%. That's our projection.

[Operator:]

And our last question comes from the line of Hillman Chan from Citi.

[Hillman Chan:]

So my first question is about our content strategy. As we are getting more and more diverse in terms of the content offering, could management share more on our focuses and plans for particular content show in 2019 to attract more new users? And related to that, how should we think about the impact to Bilibili branding and the potential impact to the core ACG user loyalty? And related to the content investment budget, could management share more on that for 2019? How should we think about the time line of turning around the business? And then my second question is on the game. Could management share more on the pipeline, the time line as well as the game approval process update?

[Rui Chen:]

[Foreign Language]

[Juliet Yang:]

I will divide our content on our platform into two brackets

[Carly Li:]

[Foreign Language]

[Juliet Yang:]

So based on what Mr. Chen has mentioned earlier, because we have a very tight community and a very high engaged city users, we'll continue to invest in our content. Based on our experience accumulated in 2018, we will invest more in the self-produced content categories. We'll focus on several verticals that has a lot of attractions from our users, for example, animation and documentaries. This will not only help us to attract and retain users. This will also help us to promote our premium membership program. More importantly, the value of those IPs from those self-produced shows. This will give us profound values of our -- of the whole Bilibili ecosystem.

[Sam Fan:]

Yes. And the percentage of the total amortized content cost with our total revenue, the percentage will be around 50% -- 15% in this year, do not include our investment in Comic business. That does not include the comic content costs.

[Operator:]

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

[Juliet Yang:]

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 content information for IR in both China and the U.S. can be found in today's press release. Have a great day.

[Operator:]

And that does conclude the conference for today. Thank you for participating. You may all disconnect.