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 of Investor Relations. Thank you. Please go ahead.

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 filings 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. 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 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 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 grew by 33% year-over-year to 84 million, outpacing the growth rate of our MAUs. This brought our D/M ratio to 27.3%, up from 26.4% in the same period last year. Daily average time spent was 89 minutes, a 9-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 quality-driven growth strategy will strategically position us to continue our growth momentum. Impacted by the challenging macro environment, our total net revenues were RMB 4.9 billion, up 9% year-over-year in the second quarter. NPUs 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 increasingly popular advertising products, such as ads…

[Operator Instructions] Our first question comes from the line of Lei Zhang from Bank of America Merrill Lynch.

[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?

[Foreign Language] Let me share some of my thoughts 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. Under the current extremely challenging macro environment and the COVID impact that's causing business everywhere a very challenging environment. And 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 resource to our core business to be exceedingly good at our core. And if it's noncore, we should put less effort and focus on the -- what matters the most. What's our core? Video and growth. And the growth is not just about user growth, but also our top line growth. So in the first half of this year, we have been allocating all of our resources, including our capital, into the areas that is our core, that is our video business, user growth, in areas that can help us to expand our top line. Even though it's a challenging environment -- macro environment, but I'm still emphasizing 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 our -- 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. And sales and marketing expense as a percentage of revenue came down from 31% same period last year to 24% in the second quarter. And also at the same time, as our costs go down, our user engagement, our user retention, has continued to improve. And improving the efficiency also comes -- goes with the technology side. In this quarter, we have optimized the allocation of our technical resources and unified investment in technology, infrastructure and concentrated our resource on solving key problems. 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. And 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. I'm expecting, for this year, as our DAU growth significantly -- and our time spent also grow simultaneously, our total investment that the server and bandwidth cost, the overall expense, will not be exceeding last -- what we spent last year. This is a perfect example of how we use technology to improve efficiency.

Okay. I will take the question about the gross profit trend. We believe our Q2 results 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. So our gross margin will gradually improve to around, like, let's say, 20% in Q4. And we will continue to adopt strict expense control measures, as mentioned by Chairman Chen. At the same time, so we expect our non-GAAP net loss ratio will also narrow down from around like 40% in Q2 to around 30% in Q4.

Our next question comes from the line of Daniel Chen from JPMorgan.

[Foreign Language] I will translate myself. So my question is on the user side. BILI's MAU have surpass over 300 million this quarter. And we also noticed that, in the second quarter, the DAU actually outgrows MAU, and the average time spent per user also grow quite nicely. So I was wondering, what's the driver behind? And also what's management's expectation for the DAU and MAU metrics for the second half and also in 2023?

[Foreign Language]I will share 3 points. As you may all aware, there has been a significant change of macro environment globally. However, we think the fundamentals of Bilibili remain unchanged. Here are 3 points that's supporting our growth. Videolization, for a start, is a global phenomenon. And we think the videolization movement will continue for 3 years at least. And this will also support Bilibili's growth, not for just 1 year, to 2 years, 3 years, as this will continue to support us. The second thing is the young generation needs their own culture and entertainment content. We have half of our users are below 25 years old. Why they're using Bilibili? Because we are providing their own cultural and content product. 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 Z generation, the Z+ generation, are more willing to spend their money into spiritual and cultural products, cultural consumption. I believe Bilibili is on the front line of this movement. That's why these 3 points is supporting our continued sustainable growth in the future. As you mentioned, indeed, for the past 2 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. And not only our DAU has surpassed the MAU growth rate, our daily user time spent has also improved sequential year-over-year for many quarters. And our daily video views grew over 80% and our user engagement, multiuser engagement numbers, has also grown significantly. So this is a very healthy model that the video views and engagement outpaced the DAU, and the DAU…

Next question comes from Brian Gong from Citi.

[Foreign Language] I will translate myself. My question is regarding the progress on Story Mode. The viewership has shown strong growth. Can management give more colors of the positioning and the strategy of the Story Mode? And how is the progress on Story Mode, like its ecosystem and the commercialization?

[Foreign Language] For the past 2 quarters, we've seen a lot of attention being placed on the Story Mode. Indeed, we have delivered a very outstanding result of how Story Mode expanding its traffic. And the reason why behind that is partially because this is from 0. We're growing this from 0. However, I wanted to emphasize here is that overall -- our overall 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 grew by 83% year-over-year. And the PUGV video views also grew over 50% year-over-year. Our Story Mode rose 400% from a very low base. But I just wanted to emphasize, this is indeed a very nice incremental traffic growth to our ecosystem. But don't forget, our overall traffic is also growing very nicely. Here, we always talked about the strategy of growing multi-scenario, multi-content category, and Story Mode is the representation of that strategy. And Bilibili's video ecosystem is a comprehensive, full bodied, well-rounded content ecosystem that centers around PUGV. And 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. 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 satisfies users' kill-time need for a 1- or 2-minute video. Probably there's 10 times of that need will come up during the day. And combined together, it would be a certain longer period of time. And more importantly,…

Next question comes from Xueqing Zhang from CICC.

[Foreign Language]And I will translate myself. And my question relates to advertising. Given the macro headwinds and the resurgence of COVID-19, what measures do we take to make the advertising business grow? And how does management think about the trend of the advertising scene in the second half of the year? Also a follow-up question on Story Mode. We have launched advertising. How much utilization in Story Mode since April? So could you share more details about it?

[Foreign Language] A combination of global macro economic 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 to 2 years. We've noticed that the budgeting is shrinking, advertisers have become more conscious when thinking about investing in brand advertising. And emerging industries are also struggling. So 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 are comparing to 2021 or prior years. Within this challenging macro environment for Bilibili's ad business in the second quarter, we grew 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 a market share gain. What we'll do to cope with this change, we believe in every crisis lies great opportunity. In cope of the current challenges and opportunities, we raised our strategy for the next 3 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. We have completely integrated the live broadcasting and video community on the 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 two middle platforms, plus two business center structure. The two middle platforms, two business center. One is a large middle platform serving all commercialization efforts…

[Foreign Language] You mentioned about the Story Mode. Indeed, it's a new ad scenario, and it's incremental traffic growth for our company. And 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. But if we look at a longer period of time, from 2023 to 2024, '25, the ad business growth will largely depend on our ability to build a well-rounded ecosystem that's ecosystem-based, industrialized, integrated marketing solution. Under the current challenging macro environment, we still hope and believe our ad revenue growth can be as healthy and as sustainable as our user and community growth. We are also confident to deliver and achieve win-win situation with our business partners. Thank you.

Thank you. And that concludes the question-and-answer session. I'd now like to turn the conference back to management for any additional or closing comments.

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, both in China and in the U.S., can be found in today's press release. Okay. Thank you.

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