Bilibili (Nasdaq: BILI; HKEX: 9626) today released the second quarter financial report for the year 2024 ending on June 30: Total net revenue was 6.127 billion yuan, a 16% year-on-year increase. Net loss was 0.608 billion yuan, a 61% year-on-year narrowing. Adjusted net loss, not following the generally accepted accounting principles in the USA, was 0.271 billion yuan, a 72% year-on-year narrowing.

Following the release of the financial report, Bilibili Chairman and CEO Chen Rui, Vice Chairman and Chief Operating Officer Li Ni, as well as CFO Fan Xin and other company executives attended the subsequent financial report conference call, interpreting the key points of the financial report and answering analysts' questions.

The following is the main content of the analyst Q&A session of this conference call:

JPMorgan Chase analyst Daniel Chen: My question is about the company's advertising business. Bilibili's second-quarter advertising growth is quite impressive. Can you share the driving force behind this? And what are the trends for the development of the advertising business in the second half of the year?

Chen Rui: In the second quarter, despite a challenging macroeconomic environment, our advertising business still achieved a 30% year-on-year growth. Single-quarter revenue broke through 2 billion for the first time, contributing one-third of the company's overall revenue. Bilibili's advertising business has also achieved high-speed growth for several consecutive quarters. In our view, the underlying logic of strong growth is essentially the increase in platform traffic and the gradual release of our users' commercial value. The second-quarter DAU (daily active users) increased by 6% year-on-year, and video views increased by 18% year-on-year, which means that commercial traffic is continuously growing.

At the same time, we also know that over 70% of young people in China are using Bilibili. Our average user age has reached 25, which is a stage where consumer demand and purchasing power are rapidly growing and being released. This can also be seen in the video categories watched by our users. In the second quarter, the video views for furniture, property/a-reit, autos, and fashion & beauty categories increased by over 30% year-on-year, and the video views for the maternity and baby category increased by over 80% year-on-year.

In addition to the underlying logic mentioned above, I believe that the strategy of our advertising business, which is the “One Horizontal, N Vertical” strategy we have been emphasizing, has also played a role. “One Horizontal” refers to the infrastructure of our advertising business, while “N Vertical” refers to solutions for vertical industries. We have been continuously improving the infrastructure of our advertising platform, which allows our ads to better match user needs.

For example, in the first half of the year, we upgraded the PC-end delivery platform and provided a one-stop professional delivery tool, resulting in a 50% year-on-year increase in the number of major customer effect ads in the first half of the year. Another example is in advertising material delivery, where our newly launched Creative Studio applies the latest AI content generation technology to help advertisers diagnose and optimize materials. After the upgrade of the Creative Studio, our material delivery achieved a more than 30% increase in CVR (click-through rate).

Let me explain "N Vertical", which is the vertical industry. In the second quarter, our top five advertising clients came from the gaming, e-commerce, digital appliances, food and beverage, and automotive industries. Among them, e-commerce and digital appliances were the two biggest drivers of advertising growth in the second quarter.

I will focus on e-commerce and trade because our e-commerce business has always adhered to an open strategy. During this year's 618 promotion period, Bilibili achieved deeper integration marketing and advertising cooperation with various e-commerce platforms and received more budget from e-commerce merchants. During the 618 period this year, advertising spending by e-commerce clients on Bilibili increased by 300% compared to the same period last year. The sales generated from our efforts increased by over 140% year-on-year. During the 618 period, we also brought a 50% new customer rate to the industry, of which the maternity and child industry brought in more than 70% new customers.

In terms of trade, nearly 40 million users watched product placement content on Bilibili in the second quarter, a 70% increase compared to the same period last year. The number of UP main contributors and the number of product placement articles on Bilibili both increased by over 130% and 330% year-on-year respectively, while the number of live commerce sessions increased by 270%. Additionally, half of Bilibili's users are female, and the consumption potential of our female users is gradually being released. For example, the sales of fashion accessories in the second quarter increased by more than four times year-on-year. These are the reasons behind the rapid growth of the company's advertising revenue in the second quarter.

Looking ahead to the second half of this year, we are confident in maintaining a growth rate higher than the industry average. On one hand, the potential released by the optimization of our advertising products and infrastructure will continue. On the other hand, we will upgrade our solutions for vertical industries and obtain more incremental growth in areas such as online services, education, healthcare, and maternity. Lastly, Bilibili's revenue does not solely rely on advertising. We have always operated on a model that combines consumer (C-end) user payments and advertising payments from enterprise (B-end) clients.

We are fundamentally a community, so our users have a strong desire to express their love for the platform by paying for content and supporting UP creators. On one hand, we generate revenue from user payments on the C-end, and on the other hand, we have built a profitable advertising business. In the future, we will continue to maintain a revenue model that combines game memberships, live streaming, and advertising income.

UBS analyst Felix Liu: My question is about the game "San Guo Mu Ding Tian Xia". Can the company share the reasons behind the success of this game? And what are our expectations for the game's lifecycle? What other game categories do we plan to expand into in the future?

Chen Rui: "San Guo Mu Ding Tian Xia" is indeed a hit game in the entire gaming industry in the first half of the year. It attracted millions of downloads in the first week after its launch, and has received positive industry recognition and user feedback. It has also set several records for Bilibili's gaming business. For example, it ranked in the top three of the iOS bestseller list and remained in the top ten during the first month. "San Guo Mu Ding Tian Xia" is also the fastest game in Bilibili's history to achieve 1 billion in revenue. I have always emphasized the principle of long-term operation for our gaming business, and "San Guo Mu Ding Tian Xia" aligns with this principle. On August 3rd, the game entered its second season, and based on current trends, user love for the game and revenue data are in line with our expectations, which gives us confidence in long-term operation.

After seeing the success of "San Guo Mu Ding Tian Xia", many people have asked why Bilibili was able to create such a game. I believe that "San Guo Mu Ding Tian Xia" is the result of Bilibili's efforts to make its game categories more youthful in the past two years. The project was initiated in 2022, and the investment and R&D team were set up in the same year. It was not a random decision, but a result of long-term thinking and a strategic decision to make our game categories more youthful.

After 2019, Bilibili's MAU (monthly active users) has more than tripled, as the user base quickly grows and expands. Five years ago, we only had 100 million MAU, and the largest group of gamers in our user base was definitely the audience for 2D games. However, when our MAU reached 0.34 billion, the gaming audience in our user base expanded far beyond just 2D games. For example, we found that among the user base interested in knowledge content on Bilibili, including history, military, and other social sciences, many are users interested in SLG (strategy games). Given that SLG is a broad category with several tens of millions of current and past players in the market, many of these users are on our Bilibili platform.

After observing this situation, we initiated the 'Romance of the Three Kingdoms' project, internally codenamed NSLG, which stands for New SLG. As for why it's called New SLG, first, we believe that there are some pain points in current SLG games, and if we can improve upon those, it will have strong appeal to the players. Secondly, the current SLG category lacks appeal to younger users, and we believe that by innovating in this category, we can make it more attractive to the youth. Based on the results, we have achieved both of these points. Additionally, I believe that 'Romance of the Three Kingdoms' should just be one example. The principle of rejuvenating categories for the youth should be applicable to multiple game categories in our future endeavors.

In terms of our expectations for the lifecycle of this game, SLG games themselves can have a very long lifecycle. Similar products in the industry have maintained stable operation for eight years or more. Internally, the target provided by the game's release team is to ensure that 'Romance of the Three Kingdoms' becomes a high-quality game with a continuous operation of five years or more. We need to prioritize long-term operation and recognize that the gaming industry is no longer about making quick money, but rather, it must focus on optimizing long-term operations and user experiences. We must strive to become the most attentive and respectful company in the industry, and aim to keep operating this game in the long run.

Jeffrey analyst Thomas Chong: A question about the trends in content categories of the company. As Bilibili's average user age has increased to 25 years, what changes has the company observed in content categories and consumption trends?

Chen Rui: I remember discussing in the last quarterly report that our average user age has already reached 25 years, which has brought some changes to Bilibili, mainly in significantly widening the variety of content and adding a lot of new content. Bilibili is now not just a playground for the interests of young people, but also a gathering place for their lifestyle consumption. Looking at the video viewing data, in the second quarter, the fastest-growing content categories related to the consumption of young people on Bilibili included home, property, autos, and fashion & beauty, with a respective year-on-year increase in video views of 39%, 43%, and 30%. When I was addressing the advertising question earlier, I mentioned that the daily video views for the mother-baby and child category increased by over 80% year-on-year, and this is the inevitable result of the average user age reaching 25.

An average age of 25 means that half of the users are over 25 years old, and half of the users are interested in the content that people over 25 are interested in. Due to Bilibili's characteristics of authenticity, professionalism, and mainly featuring mid to long-form videos, Bilibili has basically become the platform that Chinese youth visit before making major purchases. Trust in the platform or content creators, as well as more professional buying advice, is needed before making major purchases, and the videos need to be a bit longer because it's difficult to explain why someone should buy a particular car in just 15 seconds.

Speaking of autos, during the first half of this year, 73 million users each month used Bilibili to research autos. Additionally, I believe that Bilibili is now absolutely the platform with the highest quality new car evaluation content. Personally, I only watch new car reviews on Bilibili now, and it's truly professional. Furthermore, the video format is perfect for conducting high-quality, in-depth evaluations on these major purchases.

To summarize the emerging life consumption content on Bilibili, I also want to mention that our traditional content categories that appeal to young people continue to experience very good growth. In the second quarter, videos in the gaming, knowledge, and technology categories all achieved more than 20% year-on-year growth, reaching 21%, 29%, and 29% respectively. In interest-related categories, Bilibili has become the primary mental destination for young people. Speaking of games, on the day that 'A Chinese Odyssey: Love of Eternity' was released, tens of thousands of people live-streamed themselves playing this new game on Bilibili, a sight that may be rare in the entire world. On that day, our concurrent live-streaming number exceeded 2 million, demonstrating our continuously strengthening capability in interest-related categories.

In summary, I believe that an important indicator of community competitiveness is community vitality, and an important indicator of community vitality is whether the community can continuously generate new content. I think the history of the past 15 years has proven that Bilibili is a community that can continuously produce new and vibrant content.

China International Capital Corporation analyst Zhang Xueqing: My question is about the financial outlook. The company's gross margin has continued to increase this quarter, and the cash flow performance is also impressive. I would like to ask the management about the financial data outlook for the second half of the year. Specifically, can we achieve breakeven in the third quarter, or can we actually generate profit? What is our long-term profit outlook?

Fan Xin: The company's financial performance in the second quarter shows that our business model has great potential in improving gross margin. In the second quarter, our total revenue grew by 15%, and gross profit increased significantly by 49% year-on-year. The gross margin increased by nearly 7 percentage points, from 23% to nearly 30%, and achieved eight consecutive quarters of profit margin improvement. The main reasons are our ability to control costs and achieve rapid revenue growth.

With the continued growth of our high-margin advertising and gaming business, there is still a lot of room for improvement in our gross margin. In addition, it is worth noting that our operating cash flow in the first half of this year was 2.4 billion RMB, and the free cash flow reached 1.5 billion RMB, indicating that our business has entered a positive cycle.

Looking ahead to our financial performance in the third quarter, the balance of deferred revenue has increased by more than 0.77 billion RMB on a month-on-month basis, laying a good foundation for revenue growth in the third quarter. We expect strong growth in gaming and advertising revenue, while gross margin will achieve significant quarterly growth.

In the third quarter, in addition to achieving our initial goal of breakeven growth, our current goal is to achieve a significant operating profit under non-US GAAP. At the same time, we are also pleased to see robust growth in our core business lines. Our momentum of growth and prudent cost and expense management will drive the continued expansion of our revenue scale and profitability by 2025, and promote the ongoing improvement of our operating profit margin.

Huaxing Capital analyst Yiwen Zhang: A question about artificial intelligence, in which scenarios has the company applied this technology, and what other businesses have potential applications in the future?

Chen Rui: As we all know, Bilibili should have the richest and highest quality artificial intelligence content on the web. This is because our users are generally more educated, and the proportion of users from first and second-tier cities is also very high. Based on our data statistics for the first half of the year, more than 80 million users watch artificial intelligence-related content on Bilibili every month, and the content is not just a simple news headline, but contains a lot of professional and in-depth artificial intelligence content.

I believe this also constitutes three key points for Bilibili in the field of artificial intelligence: firstly, the highest number of people in China who are truly interested in artificial intelligence technology are on Bilibili; secondly, Bilibili also has the highest density of artificial intelligence practitioners in China; thirdly, over 90% of artificial intelligence companies in the country choose to establish accounts and communicate with users on Bilibili.

Due to possessing this natural advantage, we have indeed been exploring some possible applications in the field of artificial intelligence relatively early. For example, on the creative side, it was actually initiated by our users, using artificial intelligence for creation and then spreading it through the Bilibili platform.

For instance, in 2023, something widely known in the entire industry and recognized by many ordinary users is Sun Yanzi's artificial intelligence image, which gained popularity on Bilibili. Sun Yanzi's artificial intelligence performance, with even Sun Yanzi herself coming out to express support for using artificial intelligence to simulate her voice. Another example is the abundance of AI-generated music released on Bilibili this year, as well as numerous AI-supported animations and short dramas that are also published on Bilibili. Our category operation also held the AI Short Drama Competition, attracting a lot of creators' attention. We have also incorporated AI-assisted creative tools which have been well received by content creators.

I believe that for Bilibili in the creative aspect, artificial intelligence plays a very important role in enhancing efficiency, increasing the frequency of creators' uploads, and enabling more ordinary users to become creators through AI technology, which has a very positive impact on the supply side. On the user side, we use some AI capabilities to enhance user experience. For example, everyone should be aware that Bilibili has already opened up its AI search function to all users. The vast amount of knowledge, disciplines, courses, and evaluations on Bilibili can be easily accessed by users through AI search to find answers related to a specific knowledge or to check evaluation results, making it very convenient for users.

There are also some very practical functions, such as AI translation. Our AI translation function can indeed translate some minor languages. Like some Tibetan content posted by our Tibetan content creators can also be translated. Another useful function is AI summarization and aggregation. For instance, if you want to watch a video but don't have time, you can use our AI assistant to summarize what the video is about, essentially turning the video into a short article for you to quickly understand its content. I think these functions have been gradually rolled out and will definitely be very helpful for users.

Lastly, I believe that artificial intelligence is a technology that benefits everyone, and I think all platforms, manufacturers, and users will benefit from the advancement of artificial intelligence technology. In the field of artificial intelligence, our positioning is as a platform, providing users with the value and benefits created by artificial intelligence technology, while also helping partners contribute more of their value on our platform through this technology.

In the field of artificial intelligence, we collaborate with multiple leading artificial intelligence companies, hoping to bring more and better experiences to users, and also hoping that these leading AI companies can create more value on our platform. For example, you may have noticed that our current ability to generate videos using AI is the result of collaboration with a specific leading AI company. We will continue this collaboration, hoping that these partnerships can bring more and better capabilities to users.