Good day, and welcome to Bilibili Second Quarter 2023 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'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 the Hong Kong Stock Exchange. The non-GAAP financial measures we provide are for comparison purposes only. Definitions 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 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 Lee, 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.

[Interpreted] Thank you, Juliet. And thank you, everyone, for participating in our 2023 second quarter conference call to discuss our financial and operating results. I'm pleased to deliver today's opening remarks on behalf of Mr. Chen. We set our sights on prioritizing profitability and DAU growth, and we have made solid steps toward these goals. In the second quarter, we meaningfully improved our gross profit and narrowed our losses, while continuing to deliver healthy DAU growth and the strong community metrics. I will share more color on both fronts. First of all, on our path to profitability. In the second quarter, we further improved our commercialization efficiency, enabling us to convert our growing traffic to quality top-line growth. The momentum we see in our advertising and live broadcasting business is encouraging. In the second quarter, our ad revenues increased by 36% and live broadcasting revenues increased by 32% both year-over-year. Moreover, our gross profit increased significantly by 66% year-over-year, driving our gross profit margin to 23%, marking the fourth consecutive quarter of improvement. Meanwhile, we have continued to strengthen our expense controls. Our total operating expenses declined by 14%, including a 22% decrease in sales and marketing expenses, a 14% decrease in G&A expenses, and 7% decrease in R&D expenses, all on a year-over-year basis. These margin enhancements and our effective cost management contributed to our bottom-line improvement. We meaningfully reduced our non-GAAP net loss by 51% year-over-year. Moving on to our community growth. Our DAUs increased by 15% year-over-year to 96.5 million in the second quarter, driving our DAU to MAU ratio up to 29.8%. Meanwhile, the users' average daily time spent on our platform reached 94 minutes in the second quarter, driving total time spent up by 22% year-on-year. We are pleased to see this strong DAU growth…

I will now provide a brief overview of our financial results for the second quarter of 2023. As mentioned in Mr. Chen's remarks, our financials continue to improve. We are improving our margins and showing clear results in our bottom-line with narrowed losses. Total net revenues for the second quarter were RMB5.3 billion, up 8% compared with the same period last year. Our total net revenues breakdown by revenue stream was approximately 43% VAS; 30% advertising; 17% mobile games; and 10% from our IP derivatives and other businesses. Our cost of revenues decreased by 2% year-over-year to RMB4.1 billion, driving our gross profit to RMB1.2 billion, up 66% year-over-year. Our gross margin was 23%, up from 15% in the same period last year. We expect gross margin to continue to improve throughout the back half of the year. Our total operating expenses were down 14% year-over-year to RMB2.5 billion. Tight control of our expenses is ongoing while we improve our monetization at the same time. We cut sales and marketing expenses by 22% year-over-year to RMB918 million, while our DAUs grew by 15%. As a percent of total revenues, sales and marketing was 17%, compared with 24% in the same period last year. G&A expenses were RMB539.7 million, down 14% year-over-year. R&D expenses were RMB1 billion, down 7% year-over-year. Our net loss and adjusted net loss were RMB1.5 billion and RMB964.1 million, respectively, narrowing by 23% and 51%, year-over-year, respectively. Our adjusted net loss ratio in the second quarter was 18%, improving from 40% for the same period a year ago. Turning to our capital allocation and liabilities management. In June 2023, we completed the repurchase right offer for our 2027 notes with a total principal amount of US$746 million. As of the end of the second quarter, our outstanding convertible bonds totaled a principal amount of US$876 million. As of June 30, 2023, we had cash and cash equivalents, time deposits and short-term investments of RMB14.3 billion, or US$2 billion. We believe this amount is sufficient to cover all of our remaining convertible bonds and fund our future operations. Thank you for your attention. We would now like to open the call to your questions. Operator, please go ahead.

Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] We are now taking the first question. And the first question is from Xueqing Zhang from CICC. Please go ahead. Your line is open.

[Foreign Language] Good evening, management. Thanks for taking my question, and congrats on advertising towards profitability. My question is about user engagement. DAU further increased in the second quarter. So, what's the DAU trend going forward? And can management share more details on the user engagement during the recent summer holiday? Thank you.

[Foreign Language] [Interpreted] Since last year, I have been emphasizing increasing our earning power and achieve healthy and sustainable DAU growth are the top two priorities of our company, and we have been executing on that strategy. In the second quarter, with sales and marketing down 22% year-on-year, we have grown our DAU by 15%, reaching 96.5 million. And our daily time spent -- daily user time spent reached 96 -- 94 minutes. This is the record high of same period in our operating history. And our overall time spent of the entire community grew by 22% year-over-year. All of above metrics shows a very healthy and robust growth of the community. The reason why we have been emphasizing on the healthy growth of our DAU is because we believe the healthy growth of DAU is the foundation and preliminary requirement for Bilibili to achieve sustainable profit. And we believe we have already discovered an effective way to convert our high-quality traffic into increasing top-line through advertising and live broadcasting. And we believe with this effective route and methods, we can achieve DAU and top-line growth and this will be a virtuous cycle. In the second quarter, our ad revenue and live broadcasting revenue achieved 36% and 32% year-on-year growth, respectively, which exceeded the industry average growth a lot. As for the outlook into the summer, given that we're in August in the period of the summer vacation, we have been witnessing and experiencing a strong DAU and daily user time spent growth. We do expect that in the third quarter, our DAU can surpass a very exciting milestone of 100 million, and we also expect our average daily time spend can reach a new historical high. We are very confident with tight control on sales and marketing expense, we can continue to attract our users with high-quality content and retain our user with our engaging community and achieve DAU sustainable and healthy growth. And we also believe this high traffic can be effectively converted to our sustainable top-line growth.

Next question, please. Thank you.

Thank you for the question. We are now taking the next question. Please standby. And the next question is from Lei Zhang from Bank of America Securities. Please go ahead. Your line is open.

[Foreign Language] Thank you management for taking my question, and congrats on solid advertising growth. My question also related to ad business. Can you share with us the major driver of the ad business, follow the strong base of second quarter? Also, can you give us some updates on the June 18 promotion at -- growth on our platform? In addition, how should we look at the second half ad growth on Bilibili? And how should we think about the new business, e-commerce streaming development to our ad business? Thank you.

[Foreign Language] [Interpreted] In the second quarter, our ad revenue grew by 36% year-on-year. And overall, for the first half of this year, our ad gross rate has exceeded the industry average. At the same time, if you look at the ad revenue per -- ad revenue as percentage of a total revenue, it has increased from 25% same period last year to 30% in the second quarter, which directly lead the growth of our gross profit. The one horizontal one vertical strategy we mentioned last quarter is beginning to pay off, and that's been driving our advertising revenue growth. The one horizontal, actually referring to the technology middle platform and the data capability, includes optimizing the recommendation model, improving the advertising inventory and matching efficiency and the application of AIGC to improve overall ad efficiency. The one vertical is referring to the six customized industry app models, including games, e-commerce, FMCG, automotive and Internet service; among which, e-commerce and games starting to show very positive results. In the second quarter, ad revenue from e-commerce industry grew by over 140% year-on-year and game -- and advertising revenue from game industry grew by over 40% year-on-year. The second reason is that since last year, we have sticked to the integration of content and commercialization and expand ad inventory in different scenes of the community on the basis of ensuring user experience. In the first half of this year, it has formed very good growth momentum and drove the accelerator at revenue growth. Thirdly is that you -- many of you probably already aware that we have established the trading ecosystem center to focus on building video e-commerce-related capability in the second quarter by integrating the transactional scenario into the advertising products to further boost the revenue growth. We expect the video…

Thank you. That concludes this question's answer. Operator, next question, please.

We are now taking the next question. Please standby. Next question is from Kenneth Fong from Credit Suisse. Please go ahead. Your line is open.

[Foreign Language] Thank you, management, for taking my question. We noticed that we lowered the full year revenue guidance. Can you share with us the key considerations behind? Are we still on track for narrowing losses for this year? Thank you.

[Foreign Language] [Interpreted] The reason why the guidance update is largely due to two reasons: number one, as number of our games launch plan was delayed; and secondly is, certain non-core business, such as our comic and the IP derivative and others business, is in the period of adjustment of strategy and its revenue is lower than expected. We believe the reason for guidance update, the core is just -- it's for a temporary phase change, and it's not a change of foundations. The core business actually remains intact. For example, the delay of games is just that we are recognizing the revenue a little bit later. For example, Pretty Derby has already scheduled to be launched in August 30. And this -- we will be releasing this game on that day. This is confirmed and certain. And our outlook for -- and our confidence in the quality of the game and the revenue is unchanged. And as you may have seen that in the second quarter, the core business, Bilibili live broadcasting and advertising, has achieved very solid growth. We do expect that in the second half of this year and look forward to 2024, the advertising and live broadcasting business will sustain a very healthy and solid growth. In the beginning of this year, we have set our financial target to increase gross profit and narrow our net losses. So, as a requirement -- financial requirement or KPIs to each department business lines is to ensure the absolute dollar growth for its gross profit. Strategically, we have lowered the revenue contribution of low-margin business or loss-making business, even though some of the revenue growth rate has been impacted. However, the absolute dollar of our gross profit has sustained a very healthy and robust growth. In the second quarter, our gross profit grew by 66% year-on-year, and our gross margin has experienced four consecutive quarterly growth, and our adjusted net loss has narrowed by 51% year-on-year. I'm confident to achieve our loss cutting target for 2023 and achieve our breakeven target by 2024.

Yes, this is Sam. I just want to add that on the loss reduction side, even though the revenue growth rate, and called -- Mr. Chen has already mentioned that, will be lower than expected, but we are feel confident to achieve the loss cutting target. We said in the beginning of this year, which is to cut out adjusted operation loss by RMB3 billion, so through the gross profit increase and expense control. And notably, in the second quarter, our operating cash flow was close to breakeven. We think there's a good chance that we can achieve operating cash flow positive in the fourth quarter this year. Additionally, we are confident to continue to improve our gross profit margin in the second half of this year and achieve our breakeven target by 2024. Lastly, the updated full year guidance reflects our current projection of various potential outcomes. We will try our best to ensure smooth product launch as well as achieve our goal of increasing the gross profit and narrowing losses. Thank you for your question.

Next question, please, operator.

We are now taking the next question. Please standby. The next question is from Yiwen Zhang from China Renaissance. Please go ahead. Your line is open.

[Foreign Language] So, thanks for taking my question. My question is on the game business. Can you discuss the pipeline and especially for the Pretty Derby? How should we think about your expectation? And also, can you talk about our self-development game strategy and the direction? Thank you.

[Foreign Language] [Interpreted] In the second half of this year, we have seven titles in our pipeline ready to be launched domestically and internationally. Among those seven, five of them have already gained approval and ready to be launched in the domestic market, two will be launched internationally. As for the highly anticipated game Pretty Derby, we have already scheduled the launch date to be August 30. And right now, within just two weeks of pre-registration, over 2 million users already pre-registered for this game. This is a new record for -- in our operating history for the pre-registration amount. Just because that it's such a highly anticipated games with large fan base, we actually spent a lot of effort doing the localization work, making sure that our gamers will be having the very original Pretty Derby experience. That's actually one of the reason why it has been delayed by several months. We believe that Bilibili's game launch team is the best ACG game launch team in China and they are very experienced, and they will make sure a very smooth and successful launch of Pretty Derby. And we're confident Pretty Derby will be a very successful title, and also have good user feedback and reputation. As for our self-development pipeline, we have -- actually have two ACG card game will be launched in the second half of this year. This includes one game called [indiscernible], which was already launched today. And there will be another game called [indiscernible]. This will be scheduled to launch in October. As for our self-development game strategy, as you may -- you are aware, there's been a very heavy competition among the game industry this year. As for our own self-development game, the strategy will remain unchanged, which is focus, focus our -- on…

Operator, next question, please. Thank you.

We are now taking the next question. Please standby. The next question is from Lincoln Kong from Goldman Sachs. Please go ahead. Your line is open.

[Foreign Language] So, my question is about AIGC's application to Bilibili. So, from past Investor Day, we already seen some development or strategy showcase in terms of AIGC speeding up the production efficiency, the marketing promotion tools as well as the AI-integrated search. Could management elaborate more around how we think about AGIC could benefit Bilibili?

[Foreign Language] [Interpreted] We believe this is breakthrough technology of -- AIGC, what can bring to the industry. The way we look at it, it equals to the mobile Internet that happened 10 years ago. And this will not only benefit Bilibili, it will actually benefit everyone. So, as for Bilibili, our core business is video and ACG, and it has been very clear that AIGC can enable an increased efficiency in a large amount on both fronts, for example, on content production as well as content recommendation. Also in terms -- based on the LLM, we can increase a lot of the efficiency of managing our community by understanding what the text means, the content means within our community. And we believe this technology, AIGC, has multifaced applications and scenarios to help us to improve all around user experience. As for the application scenario, actually we have already conducted some extended research and development, and we believe there's a lot of scenarios that we can leverage. For example, the prepared remarks that spoken by Sam just now before this Q&A session, actually, it was not actually conducted by Sam. It's powered by our self-developed AI tool, text-to-speech, TTS, tool. And similar products like this, we have already starting to research and develop and apply it in our various scenarios. And there are other examples. For example, this year's Bilibili Macro Link, our live virtual host, 22 and 33, their voice was also generated by the same tool, TTS AI tool that Bilibili self-developed. And another example would be knowledge-related video creation, as many knowledge content creators, they generally write the text and they record their voice. With the help of this AI tool, they can -- it can largely improve its production efficiency. As for the LLM, even though…

That concludes the questions. Operator, we can close the call today.

And that concludes the question-and-answer session. Thank you once again for joining Bilibili's second quarter 2023 financial results and business update conference call today. If you have any further question, please contact Juliet Yang, Bilibili's Executive IR Director, or Piacente Financial Communication. Contact information for IR in both China and USA can be found on today's press release. Have a great day.