Good day and welcome to the Bilibili Third Quarter 2022 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 Juliet Yang, Executive Director of Investor Relations. Please go ahead.

Thank you, operator. During this call, we will 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 filings with the SEC and Hong Kong Stock Exchange. The non-GAAP financial measures we provide are for comparison purpose only. 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. 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 read the prepared remarks on behalf of Mr. Chen.

Thank you, Juliet and thank you, everyone for participating in our third quarter 2022 results conference call. I am pleased to deliver today’s opening remarks on behalf of Mr. Chen. Our community, which is the foundation of our business and key to our long-term success, continue to expand. In the third quarter, DAUs reached more than 90 million and MAUs nearly 333 million, both up 25% year-over-year. Average daily time spent per user was 96 minutes in the third quarter, up 8 minutes from the same period last year. With that, the total time spent on Bilibili grew by 37% year-over-year. Having said that, we still face macro headwinds and uncertainties that is all over the industry. To cope with the challenging environment, we have reprioritized our goals and promoted to focus on two key topics that will help us turn the corner. First, our users and our MAUs have reached a sizable base of nearly 333 million. We think that it’s time to shift our primary focus to DAU growth. DAUs not only represent the quality and the sustainability of our community, but also directly linked to our inferential power as a platform, as well as various commercial prospects, particularly in terms of revenue generation for our advertising and VAS business. With our improving product offerings and refined algorithms, we can continue to grow our DAU base and improve our DAU to MAU ratio with reduced sales and marketing spend. Second, we are committed to improving our financials by expanding our gross margin and narrowing our losses. After a challenging first half of the year, revenues in the third quarter grew to RMB5.8 billion, up 18% quarter-over-quarter and 11% year-over-year. In the third quarter, we continue to take various actions to tighten our spending. Gross margin improved to 18%,…

Thank you. [Operator Instructions] Your first question is from the line of Daniel Chen from JPMorgan. Please go ahead.

I will translate myself. So in the previous prepared remarks, management mentioned that the user growth focus will switch into daily active user, DAU. So could you maybe elaborate more about our future user growth strategy? Thank you.

And we raised the MA centered around MAU strategy back in 2019. And in the past, we have successfully expanded our MAU from 110 million to nowadays 330 million and this is quite successful and showed our excellent execution in the past few years. Well, if we are able to grow 3x in the past few years, which supported the thesis that the Bilibili’s business model, which is the community plus the content ecosystem works and is quite successful and shows our ability to maintain a high quality, highly sticky community while we deliver a very impressive user growth. Based on our 2022’s work progress, we still see a lot of room for our MAU growth. Even in 3Q, we delivered a 25% year-on-year growth. And if we carry on the current strategy, we believe we can still achieve the 400 million MAU target by next year. Starting from 2022, we also put a lot of work in terms of the DAU growth, because we do believe that DAU compared to MAU can present the quality of the user growth as well as the sustainability of the user growth. In addition, it also directly linked to the commercial perspective of our community. Like I said, the growth is not the purpose. It’s just a way to achieve our goal of increase the quality of our users. And in the end of the day, the growth over MAU roll directly linked to the growth of DAU. And that’s why starting from this year, we are putting more emphasis and resources to increase our DAU. And if you look at our DAU-MAU ratio, it has already improved from 26% in 2021 to 27% in 2022. As you may all aware that we are facing multiple challenges from the macro environment and putting profitability at first is one of the most important task for the management. The reason why we’re putting more emphasis to DAU instead of MAU, we believe from one aspect, it can help us to increase the monetization efficiency help us to grow our revenue at the same time to reduce our sales marketing expenses and to achieve breakeven often as possible. We are very confident to the DAU growth next year, and we believe this will be more sustainable for the core company as well as be very beneficial to our commercialization efforts. And as for the outlook for next year, we hope to increase our DAU to MAU ratio to 30%. Starting from 2022, we have already taken actions to control our sales and marketing expense. In Q3 this year, our sales and marketing expense already declined 25% year-over-year. As we’re shifting our focus from MAU to DAU, we expect we can further reduce our sales and marketing expense and the magnitude of the decline will be even bigger in 2023 compared to 2022. Operator, next question, please. Thank you.

Thank you. We will now take our next question. This is from the line of Lei Zhang from Bank of America. Please go ahead.

Thanks, management for taking our question. My question is mainly on the profitability. I noticed that our operating loss narrowed in the third quarter. So how should we look at our gross margin and OP margin trend and which costs as we see for the room to control and also any change to our breakeven target? Thank you.

We raised the target of reach breakeven by end of 2024, and we will stick to that mission and goal. And as we move through 2022, obviously, there is been multiple challenges across the macro environment to reduce loss and putting profitability first is the priority for the company. And this is something I personally work after and taking charge. We have already taken actions to reduce our cost and expense. And so far, the unit cost for our server and bandwidth continue to decline. And as I mentioned earlier, sales and marketing continued to decline year-on-year for three consecutive quarters. And move forward, we will take more efforts to reduce our sales and marketing expense as well as G&A and R&D expenses. In terms of the efficiency improvement, I intend to reduce investment on the non-core business and allocating and centralize our resources in areas such as improving our commercialization efficiencies. At the same time, we will also take actions to optimize our organizational structure to reduce the fat and increase the lean, and we expect this adjustment will be completed by end of this year and will start to show on P&L starting from first quarter next year.

Yes. I will take the question in regard to the gross margin and expense trend. The company takes out more actions to reduce costs and prioritize probability. We expect our gross margin will gradually increase going forward. Sales and marketing expense in 2022 has already declined year-over-year, as mentioned by our Chairman and will continue to decline next year. And we expect R&D expenses, which will peak in Q4 this year and start to decline next year. In 2023 and the future period, we expect overall operating expenses in absolute dollar terms will decline year-over-year, and net loss will further narrow down until reach our breakeven target. At the same time, we are paying very close attention to our cash flow and tightly controlled CapEx and investment as we narrow our losses. We aim to keep our cash balance at a healthy level.

Thank you, operator. We can take the next question.

Thank you. Next question is from the line of Xueqing Zhang from CICC. Please go ahead.

My question in regards to advertising, considering the impact of COVID-19 and the weak macro environment, what’s your strategy for advertising business and how should we think about revenue growth in the first quarter and next year? In addition, during the Double 11, we noticed that Bilibili has advertising products related content e-commerce could management share more details about it? And I also want to know, is Bilibili considering launching Tojo at the present? Thank you.

Despite weaken macro environment of the ad revenue in third quarter reached RMB1.35 billion, an increased 16% year-over-year. This – we consider this is a job well done and especially the ad revenue from performance-related formats increased by over 20% year-over-year, and we have continued to take market share in the ad market. In 2023, we plan to continue to enhance our integrated marketing capability and to build a friendly and welcoming environment for advertisers. And we will continue to help advertisers to effectively reach our young generation through Bilibili’s multiple products and multiple scenarios and help them to build their brand equity. And we intend to further combine our content ecosystem with our ad business, particularly in those – in our drilling vertical increase our ad inventory and accelerate ad momentum in the consumption and transaction scenarios. For example, we are already among the top five market player in verticals like game and 3C and digital products. Another example would be for FMCG ads, which are part of young generation necessity continue to grow, such as food and beverage, skin care and cosmetics. And as we move forward, we expect verticals like automotive, baby and maternity and home decor and appliances will have great potential especially as the young generation continue to grow with Bilibili as they enter into different life stages. And in Q3, actually, the automotive sector grew over 80% year-on-year within Bilibili. You mentioned about the content e-commerce. I would rather define the content commerce in Bilibili ecosystem and consumption and transaction scenario. First of all, it’s an infrastructure for us and it is also one of the very important scenarios for commercialization. In 2023, we plan to further connect the transaction scenario with the Bilibili community and with advertising business. For example, in the past…

Operator, next question please.

Thank you. We will now take our next question. Please standby. This is from the line of Lincoln Kong from Goldman Sachs. Please go ahead.

So, my question is about the gaming business. Given that Mr. Chen, you have personally taken control of the gaming business, what’s our sort of strategy and targets and change posture taking over? And after the reduction of the mostly gaming, how is the company are looking for our overall gaming business growth outlook, especially of our sales buildup games as well as the overseas gaming strategy and progress? Thank you.

I raised the strategy of putting video and game as Bilibili’s is core business back in 2019. As a matter of fact, Bilibili is starting to explore game business from very early days. Actually, Bilibili is the platform that has the most condensed and concentrated gamer in China. At the same time, we have lots of content offerings in terms of live broadcasting and video on our platform. At the same time, the areas that we invested in regional animation and comics, has great synergies with our game business. So, naturally, it’s just a natural extension and natural course for Bilibili to put in at our core. In the past 2 years, the game business didn’t perform as well as we planned, which I believe is mainly due to the slower-than-expected self-developed game progress. The reason is that we were exploring in multiple directions by multiple teams at once, but end up spreading too thin and only just to double on many, but didn’t bear fruit. As I personally take on the game business, it doesn’t mean we are making any change to our original strategy. As a matter of fact, we will carry out more diligently to that strategy, which is develop high-quality game in-house and distribute globally and putting gaming business at our core. I intend to focus on only one or two directions focusing our best resource and our energy on doing the least, but the best towards the highest industry standards. At the same time, I will strengthen the life cycle management of our self development project to increase the investment in projects that meet patients and quickly iterate out projects that do not meet the expectations. Moving forward, my requirement for the gaming business will be to be very, very down to earth and do our best to produce the best product and try our best to increase – to enhance the business. Because we have the perfect environment in game content, I am still very confident whether it’s self-developed games or licensing games, we can deliver sustainable growth in the sector.

Operator, next question please. Thank you.

Thank you. We will now take our next question. Please standby. This is from the line of Yiwen Zhang from China Renaissance. Please go ahead.

So, my question is regarding live broadcasting. So, the integration between the live broadcasting and the media streaming has been on for a while. Can you share more color on the strategy and discuss our expectation on live streaming business? Thank you.

We think the live broadcasting business has meet our expectations this year. The first three quarters this year are live broadcasting revenue grew by 30% year-on-year. And our growth live broadcasting’s gross margin also starting to recover this year. As I mentioned in the past, we have always believed live broadcasting as a capability for the platform. It’s a natural extension of the video format of content. And our strategy has always been combined the live broadcasting ecosystem with our video ecosystem to generate fast synergies among this two. From the supply content side, we have continuously explore within our ecosystem to convert our content creators to host and convert first to content creators. In Q3, content creator/host, the number of those content creators/host has increased 73% year-over-year, which is a quite impressive growth. And this demonstrates how our strategy is working, and we are increasing the supply side of the content. We are also exploring from the demand side to fine – to discover the users that they might be both interested in the same vertical of content, whether it’s in the format of video or it’s in the format of live broadcasting. And in the third quarter, we have seen the DAU penetration of live broadcasting continued to increase and the MAU for live broadcasting also recorded a 79% year-on-year growth. This is also very, very impressive growth. Last quarter, we have combined the operation of live broadcasting with the PUGV. And from an organizational perspective, it’s the same team that’s looking over the content creators operation as well as live broadcasting host operation. And it’s also the same team that’s paying attention to user, which user is watching certain content category and what kind of live broadcasting content he or she might be interested in. We believe…

Back to you, operator. I think that’s about time for the Q&A session today.

Thank you. That does conclude the question-and-answer session. So, I would like to turn the conference back over to Juliet Yang for any additional or closing remarks.

Well, thank you once again for joining us today. If you have further questions, please contact me, Juliet Yang, Bilibili Executive IR Director or TPG Investor Relations. Our contact information for IR in both China and the U.S. can be found on today’s press release. Have a great day. Bye-bye.

Thank you. This does conclude the conference for today. Thank you for participating and you may now disconnect.