Key Takeaways:

  • Bilibili’s first-quarter revenue jumped by 30%, but a big rise in operating costs swelled its net loss by 152%
  • The company made progress on commercialization as monthly users who pay for its services rose above 27 million in the quarter, with a paying user ratio of 9.3%

By Ken Lo

The entertainment platform Bilibili Inc. BILI promotes itself as a creative space for young people to explore the latest in online video, games and animation. Its fan base keeps growing, but investors are worried they are watching the same financial story on repeat: a sequence of relatively low margins and continual losses.

The company’s latest quarterly earnings report last Thursday showed the Chinese video-sharing platform remains locked in a vicious cycle in which soaring costs turn rising revenues into a stream of red ink.

Bilibili’s first-quarter revenue rose 30% from the year-earlier period to 5.05 billion yuan ($754 million). However, operating costs ballooned as the company boosted the share of content-creation revenue given to the content creators. That content revenue allocation rose 53%, while R&D expenses surged 74%. Overall, operating costs jumped 43% to 4.25 billion yuan.

To keep its investors as loyal as its video superfans, Bilibili would need to do a better job in bringing its costs under control.

With costs rising faster than revenue, its gross profit in the first quarter fell by 14% to 810 million yuan and its net loss jumped 152% to 2.28 billion yuan.

Still, the earnings report did contain some positive plot lines.  Total monthly active users grew 31% to 294 million and its mobile active users rose 33% to 276 million. Without doubt, nurturing a large base of highly loyal content creators and users serves the company’s long-term development, but Bilibili could be paying too high a price for this potential reward.

In its earnings report, the company acknowledged that controlling costs and cutting expenses would be paramount as the business year progresses and China’s economy tries to shake off the shadow of the Covid pandemic.

The company’s CFO, Sam Fan, said Bilibili had made progress in expense control while enhancing its commercialization capabilities through selective investment in R&D. For example, it cut its sales and marketing expenses compared with the previous quarter and plans to take further cost-control steps in the upcoming quarters.

Margins on a downward slope

The company failed to reach its revenue target for the first quarter of between 5.3 billion yuan and 5.5 billion yuan. It also revised down the target for the second quarter to between 4.85 billion yuan and 4.95 billion yuan, citing the likelihood that pandemic-related containment measures might weigh on revenue.

In the face of these persistent losses, investors are worried about whether the company has the ability and the determination to turn the platform’s popularity with gamers and video producers into a winning investment opportunity.

Disappointed with the downbeat performance, investors sent Bilibili’s Hong Kong share tumbling nearly 16% during the two days after the earnings report.

In fact, the market has been troubled about lackluster margins for a very long time. The company’s quarterly margins went into a tailspin from the fourth quarter of 2020, falling to 16% during the first quarter of this year, the lowest level in three years, from a high of just under 25%.

It’s a very stark contrast with the globally dominant streaming service Netflix NFLX and the Chinese short-video platform Kuaishou Technology (1024.HK). The U.S. streaming giant enjoyed margins of at least 40% for four out of the past five quarters, while margins at the Chinese platform held above 40% for six consecutive quarters.

Even the weakest player in the industry, iQiyi IQ, achieved its best ever margin of just over 18% in the first quarter thanks to more effective cost controls than at Bilibili. But that performance from iQiyi followed five years of quarterly margins lower than 12%. Thus, investors fear Bilibili might get stuck in the same quagmire that iQiyi just managed to pull out of.

Government regulations have aways been a risk factor for Chinese video platforms. Operators and creators, if not careful, can easily touch the regulatory tripwires with the content they post, while the entertainment industry has also felt the heat from tougher tech sector controls, including stricter oversight of services popular with young people such as video gaming and online celebrity culture.

At the end of last year iQiyi was widely reported, based on industry sources, to have laid off up to 40% of its employees while Tencent (0700.HK) was also reported to have overhauled its video business, both becoming casualties of tougher regulations.

However, the market now thinks the Chinese government might loosen its grip on the platform economy, which could attract a fresh influx of capital into tech stocks. But whether the video platform sector will be among the beneficiaries remains to be seen, not least because of limited scope to relax content regulations.

A rise in paying users

Cost challenges aside, the company has made headway in commercializing its services. Its average monthly paying users jumped 33% during the first quarter to just over 27 million, translating into a paying user rate of 9.3%, beating industry rival Kuaishou’s 8.4%. And the average time its users spend on the platform per day increased to a record high of 95 minutes.

The company has cultivated a community of video creators with professional users at its core, with increasing user loyalty. On average, Bilibili registered around 3 billion daily video views in the first quarter compared with 2 billion views during the same period last year.

Hong Kong-listed Kuaishou is a good comparison for Bilibili when it comes to valuations. Kuaishou’s latest price-to-sales (P/S) ratio stands at 2.82 times, slightly lower than Bilibili’s 2.9 times, but much higher than iQiyi’s 0.67 times, suggesting that the market has consistently put greater faith in the larger video platforms.

So, taking a positive view, Bilibili’s big cost increase in the first quarter might be seen as an investment in boosting the morale of employees and content creators. But, in order to shore up investor confidence and revive its share price, the management will have to find ways to produce a more upbeat earnings storyline for the next few quarters.

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