Bilibili - Q2 2022

Transcript

Operator (participant)

Good day, and welcome to Bilibili's Second Quarter 2022 Financial Results and Business Update Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Juliet Yang, Executive Director, Investor Relations. Thank you. Please go ahead.

Juliet Yang (Executive Director of Investor Relations)

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 the SEC and Hong Kong Stock Exchange. The non-GAAP financial measure we provide are for comparison purpose only. Definition of these measures and a 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 webcast replay of this conference call will be available on 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. I'll now turn the call over to Mr. Fan, who will read the prepared remarks on behalf of Mr. Chen.

Sam Fan (CFO)

Thank you, Juliet. Thank you everyone for participating in our 2022 second quarter results conference call. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. We confronted immense headwinds in the second quarter. During the period, we steadied our company by bringing users improved products, expanding our content, and implementing further cost control measures. With lockdowns in Shanghai lifted in June, we believe the worst impact is behind us. Importantly, we expected to recover our operating margin in the second half of the year while continuing to grow our users and narrowing our net loss. Our total MAUs reached a new record of RMB 306 million in the second quarter, up 29% year-over-year, representing another exciting milestone. While we remain committed to our MAU target, we are putting additional focus on the quality of users.

Looking at metrics such as DAUs and engagement levels. In Q2, our DAUs grow by 33% year-over-year to 84 million, outpacing the growth rate of our MAUs. This brought our DAU/MAU ratio to 27.3%, up from 26.4% in the same period last year. Daily average time spent was 89 minutes, a nine minute increase compared with the same period last year. Longer user time spent and high user activity increased our total user traffic, which grew by 48% year-over-year. We believe our growing matrix of products, expanding content library, and the quality-driven growth strategy will strategically position us to continue our growth momentum. Impacted by the challenging macroenvironment, our total net revenues were RMB 4.9 billion, up 9% year-over-year in the second quarter.

MPUs increased by 32% year-over-year to 27.5 million, and our paying ratio was 9%. Followed by a slower April and May, our advertising business rebounded nicely when the lockdowns lifted in June. With the increasingly popular advertising products such as ads in Story Mode, we grow our ad revenue by 10% year-over-year. We expect to continue gaining market share in the second half of the year. During the second quarter, we also put further cost control initiatives into effect. Specifically, we cut sales and marketing expenses by 16% year-over-year. Sales and marketing expenses as a total percentage of revenue decreased to 24% from 31% in the same period last year. Server and bandwidth cost per video view also declined by 37% year-over-year.

Other adjustments we made to improve our organizational efficiency included canceling underperforming projects and reallocate resources to core business. We expect positive impact to our P&L will start to show in the second half of the year. In July, we also made some pivotal adjustments to our organization. Our goal was to be more congruent to our long-term sustainable growth. We have integrated the operations of live broadcasting with our video platform and made organizational changes that integrate our commercialization efforts across our content ecosystem, create synergies, and improve efficiency. With that overview, I'd like to go through some details of our second quarter operations across our content, community, and commercialization. We have seen many iterations of the online video space. Ours is the one that has remained expansive and transcending.

The introduction of our different formats, such as Story Mode, PUGV, live broadcasting, and smart TV, significantly boosts our viewing of all the videos we like anytime, anywhere. Looking at Story Mode as an excellent example. Story Mode is one of our newest verticals covering users' on-the-go entertainment needs. It is more efficient in distributing video in shorter lengths of time. While video views from PUGV grew 53% year-over-year, video views from Story Mode increased by over 400% year-over-year, bringing incremental traffic to our platform. This is an ongoing trend that we are seeing throughout the second half of the year. Moreover, Story Mode presents a parallel commercial prospect as the gateway to different monetization opportunities, such as advertising and live broadcasting. MAU penetration in live broadcasting continues to grow across our user base.

In July, we began to fully integrate our live broadcasting and PUGV ecosystems. Over time, we expected the combination of these two ecosystems to result in more efficient traffic execution and allocation, and inspire more content creators to become live broadcasting hosts. During the second quarter, our users primarily gravitated to lifestyle, games, entertainment, ACG, and the knowledge categories. We continue to accumulate a massive amount of content through a growing pool of talented creators. In the second quarter, we had 13.2 million total monthly average content submissions, up 56% year-over-year. Our growth stems from our 3.6 million monthly active content creators, an increase of 50% year-over-year. In the second quarter, the number of creators with 10,000 followers grow by 46% year-over-year, and the creators with over 1 million followers grow even faster at 58% year-over-year.

Notably, over 60% of the content creators who gained one million followers during Q2 was benefited from the fast-growing Story Mode traffic. We continue to expand avenues to unleash content creators' monetization potential. In the second quarter, over 1.1 million creators received monetary rewards through live broadcasting, advertising programs, or cash incentive program, up 97% from same period last year. Turning to our community, we continue to feature robust content that resonates with our users along with a welcoming community environment. We saw this across our user matrix in the second quarter with impressive year-over-year gains. Daily video views grow by 83% to 3.1 billion, and the monthly interactions grow by 73% to 12.5 billion. As I previously mentioned, the average daily time spent also increased by nine minutes year-over-year to 89 minutes.

Now, let's take a look at our commercialization efforts. Advancing our commercial prospects is one of our leading goals this year. In the second quarter, we continued to convert paying users and improved our advertising efficiency to gain more market share, maximizing our high quality user base. Looking first at VAS business. Net revenues for VAS was RMB 2.1 billion, an increase of 29% year-over-year. We converted more traffic to paying users in the second quarter, driven primarily by our live broadcasting, where we hold unique advantages given this natural extension of our video universe. Despite the challenges of stricter regulations, our live broadcasting conversion rate remained strong in the second quarter. By integrating our PUGV ecosystem with live broadcasting, we have created a win-win solution. The number of active live broadcasters increased by 107% year-over-year in the second quarter.

Our live broadcasting MAUs penetration rate continued to grow, and then PUs for live broadcasting increased by nearly 70% year-over-year. At the same time, we improved the live broadcasting gross margin by optimizing revenue sharing plans. Premium memberships for the second quarter reached 21 million, up 19% year-over-year. The majority of our users continued to be annual or auto renewal subscribers. Looking at our advertising services. Revenues from this segment reached RMB 1.16 billion, an increase of 10% year-over-year. Despite the macro headwinds, our top five verticals in the second quarter were games, digital and 3C products, skincare and cosmetics, e-commerce, and food and beverage. Optimizing our product offerings and conversion efficiency remain our strategy for our ads business. In the second quarter, we continued to dedicate our resources to expand our advertising scenarios with diverse products and improved conversion modules.

We also executed our integrated marketing campaigns and selling strategy to realize more cross-selling opportunities. The Story Mode ads we launched in April have also been welcomed by our advertisers. Lastly, on games business. Net revenues was RMB 1.05 billion in the second quarter. The lack of supply for new game content in the domestic market was the main challenge in the first half of the year. As the domestic game approval process returned to normal, we look forward to seeing the approval for imported titles. Nevertheless, our game strategy remains focused on the in-house development and bringing exciting, high-quality games to both domestic and international markets. In the second quarter, our self-development game revenues contributed around 5% of total game revenue, mainly thanks to our successful launch of Artery Gear in many countries and regions.

For our pipeline, domestically, we are actively applying for game licenses and have four titles approved for release. Six games in our pipeline, including two self-development titles, are ready to hit overseas market in the second half of the year. As a 13-year-old company, our user numbers and the revenues are still seeing robust growth, and we foresee a long runway of growth in this future. Our attention and the resources are focused on improving both our top line and bottom line. With this in mind, we plan to further enhance our operational efficiency, tighten spending, and strengthen our execution. We are committed to improving our gross margin and narrowing our operating loss in the second half of the year. This concludes Mr. Chen's remarks.

I will now provide a brief overview of our financial results for second quarter of 2022 and outlook for the third quarter of 2022. Total net revenues for the second quarter was RMB 4.91 billion, up 9% from the same period of 2021. Our total net revenue breakdown by revenue stream was approximately 21% mobile games, 43% VAS, 24% advertising, and 12% e-commerce and other business. Cost of revenues increased by 19% year-over-year to RMB 4.2 billion. Revenue sharing cost, a key component of cost of revenues, was RMB 2.1 billion, representing an 18% increase from the same period in 2021. Server and bandwidth cost, as part of a relatively fixed cost component, decreased 9% quarter-over-quarter.

Server and bandwidth cost per video views decreased 37% year-over-year, demonstrating the impact of ongoing efforts and the progress in cost savings. Our gross profit in the second quarter was RMB 738 million, and our gross profit margin was 15%. We are actively tightening our cost control measures and improving our operating efficiency. We expect our gross profit margin will start to recover beginning this quarter. Total operating expenses was RMB 2.9 billion, up 17% from the same period in 2021. Sales and marketing expenses was RMB 1.2 billion, representing a 16% decrease year-over-year. Sales and marketing expenses as a percentage of total revenue were 24%, down from 31% in the same period last year.

The year-over-year decrease were primarily attributed to decreased promotional expenses for our mobile games as well as lowered user acquisition costs. G&A expenses was RMB 626 million, representing a 44% increase year-over-year. The increase was primarily due to increased headcount in G&A personnel, higher rental expenses, and the non-recurring expenses related to optimizing our organizational structure. R&D expenses was RMB 1.1 billion, representing a 68% increase year-over-year. The increase was primarily due to increased headcount in research and development, increased share-based compensation expenses, and non-recurring expenses related to adjustment of certain game projects. Net loss and adjusted net loss was RMB 2.0 billion and RMB 1.96 billion for the second quarter of 2022 respectively. Turning to our capital allocation and the liability management.

In aggregate, we repurchased a total 2.6 million ADS for a total cost of $53.6 million at the end of June 30, 2022. In addition, we repurchased a total of $275 million 2026 Notes for a total cost of $198 million, with total future cash savings of $84 million at the end of June 30, 2022. As of June 30, 2022, we had cash and cash equivalents, time deposits and short-term investments of RMB 24.9 billion, compared with RMB 13.2 billion as of December 31, 2021.

As for our intent to convert to a dual primary listing on the main board of Hong Kong Stock Exchange with respect to the proposed conversion, we successfully obtained all necessary shareholders' approval at our company's annual general meeting, which was held on June 30, 2022. The Hong Kong Exchange has also acknowledged our application, set in October 3rd, 2022, at the proposed effective date. Our endeavor will expand our access to a wider investor base, and we expect to concurrently maintain our listing status on Nasdaq. With that in mind, we are currently projecting net revenues for the third quarter of 2022 to be between RMB 5.6 billion and RMB 5.8 billion. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, please press star one one on your telephone keypad. For the benefit of all participants in today's call, if you wish to ask your question to management in Chinese, please immediately repeat your question in English. Please limit your questions to one at a time. If you wish to have follow-up questions, please rejoin the queue. Once again, if you wish to ask a question, please press star one one on your telephone keypad. Our first question comes from the line of Lei Zhang from Bank of America Merrill Lynch. Please ask your question, Lei.

Lei Zhang (VP in Equity Research and Research Analyst)

Oh, hi. Hi [Foreign language] My question is mainly on the margin profile. We noticed that we have taken some cost control measures in first half, especially on sales and marketing expenses. So, do we see any room in other cost items? And how should we see our gross margin and net profit margin trend in the second half? Thank you.

Rui Chen (Chairman of the Board and CEO)

Let me share some of my thought about cost control and efficiency improvement. We believe this slogan is not just about cost control. It's not about not to spend money, but spend our money more wisely, spend money on the right places.

Speaker 9

[Foreign language]

Rui Chen (Chairman of the Board and CEO)

Under the current, extremely challenging macro environment and the COVID impact is causing businesses everywhere a very challenging environment. I have been telling our employees, our business under this environment needs to be more focused. Focused means that we need to allocate our best resources to our core business to be exceedingly good at our core. If it's non-core, we should put less effort and focus on the what matters the most.

Speaker 9

[Foreign language]

Rui Chen (Chairman of the Board and CEO)

What's our core? Video and growth. The growth is not just about user growth, but also our top line growth.

Speaker 9

[Foreign Language]

Rui Chen (Chairman of the Board and CEO)

In the first half of this year, we have been allocating all of our resource, including our capital, into the areas that is our core. Our video business, user growth in areas that can help us to expand our top line.

Speaker 9

[Foreign language]

Rui Chen (Chairman of the Board and CEO)

Even though it's a challenging macro environment, but I'm still emphasizing in the importance of growth within the company because growth, we believe, is the most important priority within our community. Bilibili runs a very typical internet platform business. The value of our platform really comes from the value of our users. We value the user growth, but we are also emphasizing on improving the user growth efficiency and lowering the user growth cost. As you can see, we have achieved new user acquisition costs continue to decrease, and our sales and marketing expense decreased by 16% year-over-year in the second quarter.

Sales and marketing expense as a percentage of revenue came down from 31% same period last year to 24% in the second quarter.

Speaker 9

[Foreign language]

Rui Chen (Chairman of the Board and CEO)

Also at the same time as our costs go down, our user engagement, our user retention has continued to improve.

Speaker 9

[Foreign language]

Rui Chen (Chairman of the Board and CEO)

Improving the efficiency also goes with the technology side. In this quarter, we have optimized the allocation of our technical resources and unified the investment in technology infrastructure and concentrated our resource on solving key problems.

Speaker 9

[Foreign language]

Rui Chen (Chairman of the Board and CEO)

For example, in the second quarter, our DAU grew 33% year-over-year. Our video views grew 83% year-over-year. As you may aware, the resolution of our videos has become more and more premier. We are using everything we can and on the technology side, improving the algorithm, resulted in the unit VV cost came down by 37% year-over-year.

Speaker 9

[Foreign language]

Rui Chen (Chairman of the Board and CEO)

I'm expecting for this year as our DAU grow significantly and our time spend also grow simultaneously, our total investment, the server bandwidth cost, the overall expense will not be exceeding what we spent last year. This is a perfect example how we use technology to improve efficiency.

Speaker 9

[Foreign language]

Sam Fan (CFO)

Okay. I will take the question about the gross profit trend. We believe our Q2 result has already reflected the impact of the COVID lockdowns, and we estimate our revenue will regain a sequential growth momentum in the second half of this year in Q3 and Q4. Our gross margin will gradually improve to around like, let's say 20%, in Q4. We will continue to adopt strict expense control measures as mentioned by Chairman Chen. At the same time, we expect our non-GAAP net loss ratio will also narrow down from around like 40% in Q2 to around 30%, in Q4.

Operator (participant)

Right. Thank you. Our next question comes from the line of Daniel Chen from JPMorgan. Daniel, please ask your question.

Daniel Chen (VP of Life Insurance Product Development and Management)

[Foreign language] 谢谢管理层给我机会问问题。我的问题主要是用户这块，就这个季度，其实公司的MAU第一次突破三亿，比较强。然后我们也看到就是二季度的整体的日活、月活，还有用户的时长增长都很不错，就特别是这个日活的增速是超过月活的。请问一下这个背后的驱动原因是什么？然后我们怎么看今年下半年和明年的这个日活、月活的用户的增长情况？谢谢。I will translate myself. My question is on the user side. Bilibili's MAU has surpassed three hundred million this quarter.

We also noticed that in the second quarter, the DAU actually outgrows MAU, and the average time spent per user also grow quite nicely. I was wondering what's the driver behind and also what's management expectation for the DAU and MAU metrics for the second half and also in 2023. Thank you.

Speaker 9

[Foreign language] 我这主要讲三点吧。第一点的话，就是我讲一下支撑B站用户增长的基本面。过去的一年大家都知道，就是外界的环境应该是巨变吧，但是呢，其实B站的基本面没有受到任何的影响。

Rui Chen (Chairman of the Board and CEO)

I'll share three points. As you may all be aware, there has been a significant change in macro environment globally. However, we think the fundamentals of Bilibili have remained unchanged. Here are three points that's supporting our growth.

Speaker 9

[Foreign language] 对，我觉得第一呢，是那个，我认为视频化是席卷全球的浪潮，至少还会持续三年。我认为这一点会让B站的增长也会不仅是今年会持续，明年后年也会持续。

Rui Chen (Chairman of the Board and CEO)

Videolization is a global phenomenon, and we think the videolization movement will continue for three years at least. This will also support Bilibili's growth. Not just for one year, but two years, three years. This will continue to support us.

Speaker 9

[Foreign language] 第二呢，是我认为年轻一代是需要属于他们的文化和娱乐内容的。我们有一半的用户是二十五岁以下的用户。就是为什么这么多年轻人都喜欢B站，是因为年轻一代需要属于他们的内容。

Rui Chen (Chairman of the Board and CEO)

The second thing is the young generation needs their own cultural and entertainment content. We have half of our users are below 25 years old. Why they are using Bilibili? Because we are providing their own cultural and content product.

Speaker 9

[Foreign language] 第三呢，我认为就是消费升级还是现在社会上的一个大的趋势，而内容消费是消费升级的重要的一环。就是Z时代的年轻人，他们更愿意把自己的钱投入到精神和文化的消费中去。

Rui Chen (Chairman of the Board and CEO)

Third point is the consumption upgrade is still the largest driving force within the consumption sector, and the content consumption will be a major part of it. The Gen Z, the Z plus generation, are more willing to spend their money into spiritual and cultural products, cultural consumption.

Speaker 9

[Foreign language] 所以我觉得B站它其实是一个风口型的业务，所以这是我们持续增长的基本面。

Rui Chen (Chairman of the Board and CEO)

I believe Bilibili is on the frontline of this movement. That's why these three points is supporting our continued sustainable growth in the future.

[Foreign language] 对，刚才你说关注到我们的DAU的增速是超过MAU的，确实就是这个季度和上个季度我们的DAU的增速都超过了MAU。因为我们在今年非常强调增长的质量，就是刚才我提到的降本增效，提高花钱的效率，这个其实也是这一点。

As you mentioned, indeed, for the past two quarters, our DAU growth rate has outpaced the MAU growth rate. That's because we have keep emphasizing that we will focus on the quality of the growth, which means the DAU and engagement level time spent.

Speaker 9

[Foreign language] 对，我们不仅是DAU的增速超过了MAU，而且的话就是我们每日的活跃时长，其实那个我们可以看到它也是在逐步的递增，而且我们可以看到我们的日均播放数和互动的这个增长，甚至是超过DAU的。所以的话就是它确实是一个很健康的一个模型，那就是互动超过了VV，VV超过了DAU，DAU超过了MAU。

Rui Chen (Chairman of the Board and CEO)

Not only our DAU has surpassed the MAU growth rate, our daily user time spent has also improved sequentially year-over-year for many quarters, and our daily video views grow over 80%. Our user engagement, monthly user engagement, numbers has also grow significantly. This is a very healthy model that the video views engagement outpaced the DAU and the DAU itself outpaced the MAU means this community has become more sticky engaged.

Speaker 9

[Foreign language] 对，能够做到这样的一个高质量健康增长的模型。除了刚才我所说的就是我们更重视那个，就是提高这个花钱的这个质量之外，我认为，就是我们内在的一个原因，还是我们内容生态驱动的这个模型，它本身就是一个更健康的一个增长模型。

Rui Chen (Chairman of the Board and CEO)

On top of spending our money more wisely, we believe that our business model, which is the content ecosystem driven business model, is more healthy.

Speaker 9

[Foreign language] 对我们的各种内容品类的发展都非常的健康，就是我们过去就是大家都非常喜爱的那些品类，无论是包括像动画、美食、音乐这些品类，它们的增长依然非常的快速和健康。同时的话，很多新的品类还在不断地扩张，这样的话，它能够不断地出很多新的好的创作者，也能够不断地出新的好的作品，甚至是很多现象级的作品。比如说像二舅的一个传播，它就是我们经常能够出现象级的作品的一个例子。

Rui Chen (Chairman of the Board and CEO)

As for our content categories, it has been very healthy across different verticals. Our traditionally strong anime, music, food is growing very healthy. We are also witnessing a lot of new category expansion because we have such healthy ecosystem. You can continuously discover new content creator very high quality content, and we have many, many new titles went viral. For example, the phenomenal Second Uncle PUGV has been a perfect example of how Bilibili can continuously create high quality content, and you can discover very talented content creator on our community.

Speaker 9

[Foreign language] 而且呢，我认为我们过去一直强调的那个多品类的这样的一个发展策略，它其实也是为这个健康增长也是起到了一个很好的作用。就是我们可以看到，我们现在PUGV、我们的直播、我们的OGV，包括我们的Story Mode，它都是在很快地增长，这其实也是我们不断地在填充用户更多的新的场景。

Rui Chen (Chairman of the Board and CEO)

Secondly is our multi-scenario multi-content category approach is also helping us to grow healthily. As you may see from our platform, the PUGV, live broadcasting, OGV, and even a newly emerged Story Mode, they are all growing very nicely and we are actively supplementing those video scenarios that's helping our user become more engaged.

Speaker 9

[Foreign language] 最后，我还是要提出，我们是有信心达到我们过去所说的2023年四亿MAU的目标的。而且，我们完成这个目标的方式并不是交作业。大家可以看到，事实上我们对DAU的重视程度是高于MAU的。我们的工作肯定是以确保健康的一个前提下来实现我们的用户增长。

Rui Chen (Chairman of the Board and CEO)

Here I wanted to lastly re-emphasize our MAU target to achieve 400 million by end of next year. We won't be achieving this number just for the sake of achieving a number. We will be more focused on the quality of the user growth. As you can see, we're putting more emphasis on the DAU growth. We wanted to achieve a healthy and sustainable growth going forward. Thank you.

Operator (participant)

Thank you. Next question comes from Brian Gong from Citi. Please ask your question, Brian.

Brian Gong (Internet and Media Research)

[Foreign language] 晚上好，谢谢管理层接受我的提问。我的问题是关于Story Mode，这边最新的进展。我们也是看到Story Mode viewership增长得非常强劲。想请问一下，管理层对Story Mode的定位和战略是怎么样的，以及目前各方面的推进如何，包括商业化这一边。谢谢。I will translate myself. Good evening. Thanks management for taking my question. My question is regarding the progress on Story Mode. The viewership has shown strong growth. Can management give more color on the positioning and the strategy of the Story Mode?

How is the progress on the Story Mode like its ecosystem and commercialization? Thank you.

Speaker 9

[Foreign language] 对，我回答一下关于Story Mode的问题吧。因为在过去两个季度，我发现大家都比较关注Story Mode，因为它的增长数字很亮眼。但我这还是要强调这个增长数字的前提是因为我们Story Mode是从无到有，所以的话就是它看起来它的那个数字确实很大。但是呢，我们如果看整体的数据，我们会发现它其实是在我们整体增长的情况下，它创造了一个新的增长的增量，就是我们的VV整体的同比增长是83%，然后我们原有的PUGV的VV的同比增长是53%。所以的话就剩下的那一部分，它是一个Story Mode的VV的增长，这部分VV增长看起来数很大，400%。但是呢，因为它是一个全新的增量，所以它看起来是很大的。其实我们整体的这个VV的增长也挺大。

Rui Chen (Chairman of the Board and CEO)

For the past two quarters, we've seen a lot of attention being placed on the Story Mode. Indeed, we have delivered a very outstanding result of how its Story Mode expanding its traffic. The reason why behind that is partially because this is from zero. We're growing this from zero. However, I wanted to emphasize here is that overall, our traffic is also growing very significantly, and Story Mode is the incremental traffic add on to our total traffic. For example, if you look at the total VV, we've grown by 83% year-over-year, and the PUGV video views also grow over 50% year-over-year. Our Story Mode grew 400% from a very low base. Just wanted to emphasize this is indeed a very nice incremental traffic growth to our ecosystem.

Don't forget, our overall traffic is also growing very nicely.

Speaker 9

[Foreign language] 对，其实 Story Mode 它是我们就是过去一直强调的多场景多品类的一个策略的一个体现。事实上，B 站的视频它是一个完整的内容生态，它是以 PUGV 为主，然后我们的直播、我们的 Story，包括我们在大屏上看的这个场景，这些它都是那个 PUGV 的内容生态的一个自然的延伸，然后它起到的——它们起到的一个作用都是就是在原有 PUGV 生态的基础上，要么是占用用户新的场景，要么呢，是原来的 UP 主和用户能够有一个新的互动形式。

Rui Chen (Chairman of the Board and CEO)

Here, we always talk about the strategy of growing multi-scenario, multi-content category, and Story Mode is a representation of that strategy. Bilibili's video ecosystem is a comprehensive, full-body, well-rounded content ecosystem that centers around PUGV. Along with live broadcasting Story and our smart TV application, all of that is a natural extension of our original PUGV ecosystem. Whether it's adding a new scenario for users' fragmented time or allowing the original content creator to become live broadcasters, this comes from the original PUGV ecosystem.

Speaker 9

[Foreign language] 就是Story它确实对原有的B站的内容生态，它是创造了一个重要的补充，那就是它满足了用户碎片化的时间的这种内容消费的需求。因为在用户碎片化时间的时候，Story这种方式它是能够非常高效地去满足用户，我就想是看一分钟两分钟的这个时间看视频打发一下这样的需求。但是也许这样的场景在一天里面可能有十次，它加起来是一个很长的时间。我认为Story它是满足了这个场景的需求。

Rui Chen (Chairman of the Board and CEO)

As for the Story Mode, we believe it's a very important supplement to our original content ecosystem. This product satisfy users on-the-go entertainment needs for their fragmented time, and satisfy users kill time need for a one or two minute video. Probably there's 10 times of that needs will come up during the day, and combined together it will be a certain longer period of time.

Speaker 9

[Foreign language] 而且的话，它尤其是对于我们的一些低活用户，就原来的一些低活用户，它是起到了一个很有效的促进活跃的作用。因为可能原来的一些低活用户，他也许是觉得B站的视频这个长度太长了，或者说是B站的视频，它有一些审美的门槛等等的。但是有了Story Mode的这种方式的话，就是它能够更有利于他切入到我们的这样的一个内容生态，它变成了一个对于这些低活用户很好的拉活以及拉他们进阶的作用。

Rui Chen (Chairman of the Board and CEO)

More importantly, we believe the Story Mode has been very beneficial for us to improve the engagement level of those users that are less active. Some of them might think some of the video on Bilibili is too long, or it's more difficult to comprehend. The launch of Story Mode is helping them to quickly adapt into the Bilibili community, to help them understand, to get them a quick start to blend into our community.

Speaker 9

[Foreign language] 对，而且的话，不仅对于用户，它对于我们的这个新的UP主，以及于这种低粉UP主的涨粉，它也能够起到一个拉动的作用。可能过去我们的UP主，新的UP主，他要涨粉，他就只能去磕一个又一个的比较大部头的视频。但是现在呢，他除了像原来这种就是死磕大部头的这种方式，他还能够去发一些比较轻的一些视频，然后这些视频积沙成塔，来帮助他在一开始低粉的时候涨粉。这个对于UP主来说，它是一个增加了的选择，这个对低粉的UP主也是更友好的。

Rui Chen (Chairman of the Board and CEO)

Additionally, Story Mode has been very beneficial to the newly joined content creator or the content creator with fewer followers. In the past, for them to grow their followers, they have to spend a lot of time to create a high quality, longer period of PUGV. Now we are providing their new option to create a lighter, shorter creation, and this smaller creation comes together will help them to grow their followers more quickly.

Speaker 9

[Foreign language] 而且的话就是这个场景，它也为更多的原本就擅长去创作这种竖屏视频的这种UP主给了他们更多的一个机会。所以我们可以看到，就是我们在Q2，60%的新增百万粉的UP主，他是受益于Story Mode的，也就是说Story Mode它把UP主的这个上升的路径扩宽了。

Rui Chen (Chairman of the Board and CEO)

We are also noticing that this launch of Story Mode is helping those content creators who originally are good at creating short form videos, are providing them additional opportunity to grow and expand their influence on Bilibili. In the second quarter, we've noticed that the number of content creators who achieved 1 million followers, 60% of them benefited from the traffic growth of Story Mode.

Speaker 9

[Foreign language] 对，最后我还想强调的就是，Story Mode它尽管是一个竖屏的视频，但是我们在里面看到的，它也是一眼就能够看出是B站特色的高质量的视频。我们其实对这个内容生态的培育，以及在这个Story Mode里面的算法推荐逻辑，跟我们原有的PUGV是完全一致的，我们强调内容质量，强调用户的正反馈。

Rui Chen (Chairman of the Board and CEO)

Lastly, I want to emphasize that even though it's a shorter vertical video, but if you browse through the content, you can tell immediately this is Bilibili featured high quality video. The algorithm, the recommendation system behind the Story Mode is identical to the PUGV algorithms. We put same amount of weighting and emphasize on the content quality and users positive feedback towards the content.

Speaker 9

[Foreign language] 对，所以我们可以关注到，就是Story Mode它占的这个点赞的比例，是比它占VV的比例要高的。这个其实就说明了，就是用户对于Story Mode里面的视频的这个质量是认可的。而且我认为的话，就是那个未来的话，就是一定会出这种B站的这种竖屏的爆款，以及出B站原生的典型的这种Story Mode的UP主。其实现在已经有这样的那个案例了，比如说像山城小栗旬这样的那个UP主，他就是很有这个B站的这个竖屏视频的这种特点。我认为这样的UP主未来会越来越多。

Rui Chen (Chairman of the Board and CEO)

Additionally, our users are very inclined to engage within the Story Mode. From the data, it shows that the users who cast likes in the Story Mode has been significantly higher than the Story Mode as total percentage of revenue. That means that our users are recognizing the quality of the Story Mode videos. I believe in the future there will be definitely very typical and very popular Story Mode video born and went viral in the space. There will also be original Bilibili Story Mode video content creator emerging, and we are already noticing that. For example, one content creator named [Foreign language] 山城小丽寻 would be a perfect example for the Story Mode typical high quality content creation. The next question, please.

Operator (participant)

Thank you. Next question comes from Xueqing Zhang from CICC. Please ask your question, Xueqing.

Xueqing Zhang (Media Analyst)

[Foreign language] 谢谢管理层接受我提问。我的问题是关于广告的。那我们想了解在宏观环境偏弱，而且疫情反复的大环境下，我们广告业务的应对方式是什么？然后管理层怎么看待下半年广告业务的一个趋势？然后也跟进一下刚刚关于Story Mode的问题，就是想了解我们四月以来广告商业化，在Story Mode这块的一个进展。 And I will translate myself. Thanks management for taking my question, and my question relates to advertising. Given the macro headings and the resurgence of COVID-19, what measures do you take to make the advertising business grow?

How does management think about the trend of the advertising business in the second half of the year? Also a follow-up question on Story Mode. We have launched advertising commercialization in Story Mode since April. Could you share more details about it? Thank you.

Carly Li (Vice Chairwoman of the Board and COO)

[Foreign language] 确实在全球宏观经济变化跟疫情还是反复影响了这个广告行业的。其实广告行业我觉得存在这个影响，短期其实还是挺显著的。但判断在未来一到两年之内，中长期还是会有持续性的影响。广告主在这段时间的预算很明显是萎缩的，投放也会更谨慎。新兴行业其实在这个阶段的发展也比以往会更困难了。这些其实都是我们比较知道的客观现状。这个时候的话，在我们看来，用户价值高的以及转化效率高的平台的优势其实会更明显。无论如何，它肯定会比2021年前都会更艰难一些。

Speaker 9

A combination of global macroeconomic challenges and repeated COVID outbreaks in China are not only causing significant impact on our advertising industry in the short term, but also will be a lasting impact in the next 1-2 years. We've noticed that the budgeting is shrinking. Advertisers are becoming more conscious when they're thinking about their investing in brand advertising. Emerging industries are also struggling. All of these factors are actually the status quo. At the same time, we've also noticed that the platform with high user value and high conversion efficiencies will stand out. However, it will still be tougher to do business, especially in ad business if we're comparing to 2021 or prior years.

Carly Li (Vice Chairwoman of the Board and COO)

[Foreign language] 就在这个大环境基础上的话，Q2 B站的广告收入是11.6亿，同比增长10%，属于市场上比较少数在广告收入能实现同比增长的同时也实现市占率增长的平台。

Speaker 9

Within this challenging macro environment for Bilibili's ad business in the second quarter, we grow our business 10% year-over-year. We are one of very few names that achieved year-on-year growth in the advertising sector and also achieved market share gain.

Carly Li (Vice Chairwoman of the Board and COO)

[Foreign language] 那我们会怎么应对、怎么做呢？第一点的话，其实比较关键，我们相信有危机的时候就会有变局。就是为了应对外部短期的影响，包括可能长期存在的机会吧，我们内部在Q3提出了未来三年的核心战略，就是以增长为中心，坚持社区优先，生态跟商业双驱动。即第一次把商业化和社区生态提到了一样的位置。

Speaker 9

What we'll do to cope with this change, we believe in every crisis lies great opportunity. In light of the current challenges and opportunities, we're raising our strategy for the next three years, which is growth-centered, community-prioritized, and content ecosystem plus commercialization dual-engine powered. This is the first time we're putting commercialization and community ecosystem at an equally important position.

Carly Li (Vice Chairwoman of the Board and COO)

[Foreign language] 在组织上的话，我们把点播跟直播的整个组织体系彻底地融合，为了实现点值一体化，这个过程也保证了为广告渗透多场景实现了闭环。同时，我也把这个商业广告体系跟生态体系进行了进一步的打通。大概的逻辑就是商业体系，我们建立了两个中台跟两个业务结构。

Speaker 9

We have completely integrated the live broadcasting and video community on organizational structure level and achieved live broadcasting plus video all-in-one structure. This helped us to create a closed-loop ad in multi-scenarios. At the same time, we further integrate our commercialization system with our content ecosystem. Namely, we created a two middle platforms plus two business center structure.

Carly Li (Vice Chairwoman of the Board and COO)

[Foreign language] 其中一个就是公司的商业化中台，它的目标是持续提升流量货币化的效率，是广告业务的基础建设，同时也会为内部多个收入业务进行赋能。另外一个中台呢，是公司的一个小中台，主要提供UP主的收入策略以及服务，主要是提升UP主在赚钱的同时有更好的体验。那两个业务包括什么呢？就包括大家熟悉的花火，包括大家平常也熟悉的所谓的带货。以上的调整呢，是保证了商业化团队在思考上跟执行上都可以把社区生态、用户增长跟商业增长形成一个正循环。就是零障碍的过程，其实还是才能真正地在未来的时间内成为相互的驱动力。

Speaker 9

The two middle platforms, two business center, one is the large middle platform serving all commercialization efforts with the goal of improving traffic linked monetization efficiency. This will be the infrastructure of our ad business and will also empower many income business segment. Another one is a smaller middle platform. Its main purpose is to serve and help our content creator to increase their earning power and improve their overall earning experience. The two products will be, investors familiar Sparkle ad platform and the live video e-commerce product. Above mentioned adjustment will help our team bond together on a strategic thinking and execution level to create a barrier-free, self-reinforcing and a positive cycle that stimulates our content ecosystem, user growth and business growth.

Carly Li (Vice Chairwoman of the Board and COO)

[Foreign language] 第二点的话，下半年我们商业广告的打法也会进一步的迭代吧。其中，我们坚定不变的是两点。第一点呢，是重视基础建设，我们会继续加强算法跟数据的建设，就是优化不同场景的变现，让我们的整个产品能更好地提升效率。同时的话，也会在数据建设的基础上建立更营销科学的相关的体系，我觉得这是我们不变的第一点吧。接着不变的第二点呢，就是行业一定要继续垂直化，包括游戏、电商、快消、汽车等等。我们要寻找深度跟生态结合的这种方案吧。KA跟行业的预算就是能吸尽吸啊。

Speaker 9

Our advertising methods will be further iterated in the second half of this year, but the two following things will remain unchanged. One is focused on the infrastructure. Strengthen the construction of our algorithm and data power, optimize the realization of different scenarios and help improve efficiency of our products. We'll also work to build a scientific marketing system that based on data construction. The second thing remain unchanged is to provide a well-rounded one-stop solutions for industry verticals such as games, e-commerce, FMCG and automotive industries and et cetera, so that the key accounts and industry, different industry budgets we can fully absorb.

Carly Li (Vice Chairwoman of the Board and COO)

[Foreign language] 从阶段性的结果看这个趋势吧。Q3由于我们广告效率持续提升，以及经济的部分回暖，就包括我们整合营销方案的迭代，预估流水能实现同比增长约20%左右。接着，第二个呢，下半年的品牌预算虽然受到宏观经济的较大不确定性，但是来自于刚才也提到的这个Story Mode，包括我们的生态多场景的融合，也会带来一定的增量，包括转换型的广告也会获得新的广告预算。

Speaker 9

To see the trend for the second half revenue trajectories, we do expect that the overall ad grossing will grow about 20% year-over-year in the third quarter, thanks to the ad efficiency improvement and the iteration of our integrated marketing solutions. For the second half of this year, we do notice that the budget from brand advertisers remain largely uncertain due to the macro environment. However, our multi-scenario ad approaches, including the Story Mode ad, transaction-based ads, will help us to gain new market share.

Carly Li (Vice Chairwoman of the Board and COO)

[Foreign language] 第三的话，其实其中可以在Q3我们可以有一个新的进展，就是我们把B站的生态对行业的合作伙伴进一步地进行了深度开放。现在呢，已经跟淘宝、天猫，包括京东、拼多多等电商平台也达成了初步的合作，就积极地尝试在B站上进行原生广告，就是UP主的广告的种草，在我们提供产品、模型进行交易转化等尝试。就未来的话呢，我们也会积极跟所有的品牌方以及生活消费等平台跟伙伴产生不同场面的生态合作吧。就这个好处就是短期我们可以结合花火、Story、起飞等产品，能直接实现广告收入的增长。但是呢，其实我们会更看重的是中长期会持续提升B站生态的商业氛围以及用户的消费浓度，就让整个生态里面除了我们的内容消费越来越繁荣，我们的商业消费也会越来越繁荣。我们还是比较有信心，从中长期跟合作伙伴、跟UP主实现多赢的局面。

Speaker 9

In Q3, we are looking to further open our ecosystem where, with our industry partners, we have already established initial partnerships with e-commerce platforms like Taobao, Tmall, Jingdong, Pinduoduo, and we'll make active trials in models like making self-recommendations in our native ads and conduct transaction execution. Going forward, we'll also conduct various collaborations with brand advertisers and consumer goods players. In the short term, we believe we can achieve revenue growth driven by products like Sparkle, Story, and Project Takeoff. In the mid- to longer-term, the above-mentioned collaborations will help us to establish a commercial environment and build user consumption behavior. We believe this can help us to create an ever-growing commercialization environment within our ever-growing content ecosystem.

From industry perspective, we will remain our edge in leading verticals such as games, 3C and digital products, food and beverage, skin care and cosmetics, among which we believe we have stand out in the mobile games, automotive and digital products. We've seen that in the first half of this year, our mobile games ad revenue from mobile game sector grow near 90% year-over-year. Automotive ad revenue from automotive industry grow over 110% year-over-year. From industry perspective, we will remain our edge in leading verticals such as games, 3C and digital product, food and beverage, skin care and cosmetics, among which we believe we have stand out in the mobile games, automotive and digital products.

We've seen that in the first half of this year, our mobile games ad revenue from mobile game sector grow near 90% year-over-year. Automotive ad revenue from automotive industry grow over 110% year-over-year.

[Foreign language]

Rui Chen (Chairman of the Board and CEO)

You mentioned about the Story Mode. Indeed, it's a new ad scenario, and it's an incremental traffic growth for our company. We've also witnessed that the eCPM for Story Mode ads is also much higher compared to the traditional text and picture-based ads. This will help us to grow our advertising revenue in the short term.

If we look at longer period of time from 2023 to 2024, 2025, the ad business growth will largely depend on our ability to build a well-rounded ecosystem ecosystem-based, industrialized, integrated marketing solution. In the current challenging macro environment, we still hope and believe our ad revenue growth can be as healthy as and as sustainable as our user and our community growth. We are also confident to deliver and achieve win-win situation with our business partners. Thank you.

Operator (participant)

All right. Thank you. That concludes the question and answer session. I'll now like to turn the conference back to management for any additional or closing commands.

Juliet Yang (Executive Director of Investor Relations)

Thank you once again for joining us today. If you have further questions, please contact me, Juliet Yang, Executive Director, Investor Relations, Bilibili, or TPG Investor Relations. Our contact information for IR, both in China and in the U.S., can be found in today's press release. Thank you.

Operator (participant)

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.